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CEO Awards and Financial Misconduct
Abstract
We propose that CEOs are more likely to engage in financial misconduct after the media names them as being among the best business leaders. We theorize this occurs because winning such an award is a meaningful event that increases the CEO’s self-worth but also increases the CEO’s sense of psychological entitlement, including the freedom to break rules. We test our ideas by examining scenarios where award-winning CEOs feel especially entitled and therefore are most likely to commit misconduct. Using a sample of award-winning CEOs from Chinese publicly listed firms, we find that award-winning CEOs are more likely to commit financial misconduct in the post-award period than in the pre-award period. In addition, the effect of winning a CEO award on financial misconduct is stronger when CEOs are underpaid or from industries in which awards are rare and therefore more special. We also validate aspects of our theory that are difficult to observe. First, we use bivariate probit models with partial observability to confirm that our results hold when accounting for unobserved misconduct. Second, we use survey data that capture the psychological entitlement of a subsample of CEOs to confirm the mediating effect of psychological entitlement on the relationship between winning an award and committing financial misconduct.
... Prominent fraud scandals at firms, such as those affecting Wirecard, WorldCom Inc., and Luckin Coffee, not only cause harm to firm shareholders but also cause substantial damage to society as a whole (Lu et al., 2024;Ren, Zeng, & Song, 2022). Given the pervasive and harmful nature of corporate fraud (Dyck et al., 2024), regulators, researchers, and firm shareholders have long maintained a strong interest in the determinants of corporate fraud and mechanisms to prevent such behaviors (Conrad & Holtbrügge, 2021;Knechel & Mintchik, 2021;Koch Bayram & Wernicke, 2018;Li et al., 2020). ...
... Executives are the key sources of power in corporate decision making and have an important influence on corporate strategic choice and performance (Xue et al., 2024;Zhong et al., 2023). Although scholars have gradually recognized that the characteristics of executives have an important impact on corporate fraud (Benmelech & Li et al., 2020;Zhang et al., 2023), it is still unclear whether and when executives with international work or study experience who return to their home countries (hereinafter referred to as returnee executives) affect firms' involvement in corporate fraud. ...
... Specifically, we argue that the relation between returnee executives and corporate fraud is weakened by long-term performance surpluses and corporate visibility because these factors reduce the managerial discretion of returnee executives. By using privately controlled Chinese public firms for 2010-2021 as our research object, we adopt a bivariate probit model with partial observability to confirm that our results hold when accounting for unobserved corporate fraud (Li et al., 2020;Ren, Zhong, & Wan, 2022). Our final empirical and robustness test results support our arguments. ...
Whether and when returnee executives influence corporate fraud remains an important unresolved theoretical and practical problem. Referencing upper echelons theory and the literature on managerial discretion, we propose that firms with more returnee executives are more likely to engage in corporate fraud. In addition, we propose that the relation between returnee executives and corporate fraud is subject to organizational indicators that reflect executives’ managerial discretion. Specifically, we propose that long‐term performance surplus and corporate visibility diminish the positive impact of returnee executives on corporate fraud. We use privately controlled Chinese public firms, including 11,519 firm‐year observations of 2215 privately controlled Chinese public firms from 2010 to 2021, as our research object and adopt a bivariate probit model to investigate our theoretical assumptions. Our test results are consistent with our predictions. This study enhances the existing understanding of the dark side of returnee executives from a corporate fraud perspective.
... In this study, we construct a theoretical model based on the upper echelons theory (Hambrick, 2007;Hambrick & Mason, 1984) and psychological entitlement literature (Campbell et al., 2004) to explain whether and when returnee executives ultimately foster firms' excess perquisite consumption expenditures by increasing their psychological entitlement. Psychological entitlement often arises in relation to the social comparison processes (Li, Shi, et al., 2020;Poon et al., 2013;Zitek et al., 2010); due to an increase in psychological entitlement, some people believe that they should get more benefits than their counterparts because of an overestimation of themselves and their contributions (Li, Shi, et al., 2020) and that they should get more benefits than they currently do (Campbell et al., 2004;Lee et al., 2019;Vincent & Kouchaki, 2016). Compared to non-returnee executives, overseas executives may have more advanced management experience (Cui et al., 2015) and developed management capabilities to handle complex, dynamic information (Bi et al., 2022). ...
... In this study, we construct a theoretical model based on the upper echelons theory (Hambrick, 2007;Hambrick & Mason, 1984) and psychological entitlement literature (Campbell et al., 2004) to explain whether and when returnee executives ultimately foster firms' excess perquisite consumption expenditures by increasing their psychological entitlement. Psychological entitlement often arises in relation to the social comparison processes (Li, Shi, et al., 2020;Poon et al., 2013;Zitek et al., 2010); due to an increase in psychological entitlement, some people believe that they should get more benefits than their counterparts because of an overestimation of themselves and their contributions (Li, Shi, et al., 2020) and that they should get more benefits than they currently do (Campbell et al., 2004;Lee et al., 2019;Vincent & Kouchaki, 2016). Compared to non-returnee executives, overseas executives may have more advanced management experience (Cui et al., 2015) and developed management capabilities to handle complex, dynamic information (Bi et al., 2022). ...
... In turn, TMTs with returnee executives develop a higher level of psychological entitlement than those without returnee executives. Furthermore, under the influence of psychological entitlement, TMTs have a strong incentive to spend large amounts of corporate resources on perquisite consumption to satisfy their selfish desires and irrational expectations (Eissa & Lester, 2022;Li, Shi, et al., 2020), which ultimately leads to high levels of excess perquisite consumption. Indeed, relevant evidence suggests that individuals with high levels of psychological entitlement are more likely to consider themselves above the rules and are, therefore, more likely to engage in unethical or illegal behavior (Eissa & Lester, 2022;Lee et al., 2019;Li, Shi, et al., 2020;Yam et al., 2017). ...
This study examines the impact of returnee executives on top management teams' (TMTs') unethical management behavior (e.g., excess perquisite consumption). Synthesizing insights from upper echelons theory and the psychological entitlement literature, this study proposes that returnee executives cause TMTs to generate a high degree of psychological entitlement, which subsequently leads to a high degree of excess perquisite consumption in their firms. In addition, this study proposes that returnee chief executive officers, product diversification, and regional institutional development moderate the aforementioned relationships by influencing managerial discretion. This study provides empirical evidence for the above view using a dataset that was constructed based on 1960 listed Chinese manufacturing companies from 2010 to 2019. From a psychological entitlement perspective, this study confirms, for the first time, that the introduction of returnee executives may have unintended negative consequences, for example, in promoting the excess perquisite consumption activities of TMTs.
... Researchers are understandably reluctant to design a study around a method that may not yield any coefficient estimates. This risk of no convergence sometimes causes researchers to only report estimates of a bivariate probit model as a robustness check on a more stable estimation technique (e.g., Connelly, Shi, Walker, & Hersel, 2020;Li, Shi, Connelly, Yi, & Qin, 2020;Shi, Connelly, & Sanders, 2016). To address this challenge and highlight future research potential, we develop a Monte Carlo simulation which allows researchers to estimate the sample characteristics needed for reliable convergence of a bivariate probit model. ...
... External governance mechanisms such as pressure from securities analysts, on the other hand, increase the likelihood of fraud commission but do not affect fraud detection (Shi, Connelly, & Hoskisson, 2017). Recently, Li et al. (2020) use bivariate probit to validate their finding that firms with award-winning CEOs are more likely to commit fraud but less likely to get caught. Connelly et al. (2020) and Shi et al. (2016) also incorporate the bivariate probit analyses as robustness checks to their main models. ...
... The Use of Bivariate Probit.Li et al. (2020) Supplementary Financial Fraud Award-winning CEOs more likely to commit fraud but less likely to get caught. ...
... Corporate financial misconduct is a widespread phenomenon in business practice (Li, Shi, Connelly, Yi, & Qin, 2020;Lisic, Silveri, Song, & Wang, 2015). Once their financial misconduct behaviors are exposed, firms suffer penalties and negative publicity, which may result in substantial financial and reputational losses (Xu, Zhang, & Chen, 2018). ...
... In addition, corporate financial misconduct destroys investor confidence and damages the economic system (Harris & Bromiley, 2007). Thus, reducing corporate financial misconduct is a critical concern for shareholders and policy makers (Li et al., 2020;Shi, Connelly, & Sanders, 2016). ...
... We collected financial misconduct data from the China Stock Market and Accounting Research (CSMAR) database for 2008 to 2018. Data from this source have been used in previous Chinese corporate financial misconduct studies (Chen et al., 2016;Chen, Firth, Gao, & Rui, 2006;Li et al., 2020;Yiu et al., 2019). Archival corporate finance and government data are also collected from the CSMAR database. ...
Using tournament theory and agency theory, our research analyzes the different effects of internal and external tournament incentives on corporate financial misconduct and the moderating effects of organizational complexity (e.g., firm size and firm diversification) on these relationships. Based on the data of Chinese listed companies for 2008 to 2018, our results show that internal tournament incentives inhibit corporate financial misconduct, while external tournament incentives induce financial misconduct. Furthermore, firm size strengthens the positive impacts of external tournament incentives on financial misconduct, whereas firm diversification weakens the negative impacts of internal tournament incentives on financial misconduct. Our results are of interest to scholars of financial misconduct and tournament theory.
... The goal of our study is to examine, upon their peers winning antipoverty awards, whether nonwinning firms spend more efforts in poverty alleviation in the postaward period. To reduce biases from potential time trends within firms, we conduct DID regressions (Bertrand, Duflo, & Mullainathan, 2004;J. Li et al., 2022b). To do so, we need to identify a group of control firms for those nonwinning firms that have experienced peers winning awards (i.e., treatment firms). As stated earlier, we require the treatment firms to have never won antipoverty awards during our sample period and to share the same two-digit industry codes and headquartered cities as ...
... To ensure this assumption is valid, we conduct a diagnostic test. Specifically, following J. Li et al. (2022b), we compare treatment and control firms in terms of the 1-year growth rate of the poverty alleviation spending before an award was announced. The difference is not statistically significant (b = 0.893, t = 0.105, p = 1.629), suggesting there is no observable difference in the growth trend of poverty alleviation spending between these two groups of firms. ...
Research has thus far suggested mixed effects of awards on the behavior of non-winning firms. We draw from research on interorganizational spillover to study under what conditions state-sponsored awards motivate non-winning firms to increase their efforts. We contend that, when government officials—an important institutional agent—are under competitive pressure from their own rivals to pursue the state goal, they are more motivated to promote the awards and trigger peer emulation, resulting in interorganizational spillover following the bestowal of awards. In turn, non-winning firms with a greater need for government-controlled resources are more responsive to the spillover effect promoted by local officials. We test our theory with government awards to firms in China’s state-initiated poverty alleviation program. Analysis of Chinese publicly listed firms from 2016 to 2019 shows that following anti-poverty award announcements, non-winning firms improved their poverty alleviation effort more when their local government officials faced stronger competitive pressure in poverty reduction from their own close rival officials. Notably, such spillover effects did not occur when local officials faced low competitive pressure. Our study contributes to research on interorganizational spillover and awards, as well as how the state can encourage firms to tackle grand challenges.
... Although a few recent studies enhanced our understanding of the antecedents of organizational resilience at the chief executive officer (CEO) level (Buyl et al., 2019;Sajko et al., 2020), this line of research has focused primarily on the psychological traits of CEOs, with less attention to the CEO experiences which may shape their preferences and ways of thinking (Benmelech & Frydman, 2015;Sunder et al., 2017). This gap in the literature is important, as an individual's decisions and behaviors are influenced by not only who he/she is but also his/her experience (Li et al., 2022;Morgeson et al., 2015). However, relatively little attention was paid to the experiential factors associated with top corporate executives, specifically, the experiences of CEOs, who may facilitate the successful pursuit of organizational resilience. ...
... Recent works suggested that individual experience-related factors may also play a role (O'Sullivan et al., 2021;Chahyadi et al., 2021;Guo et al., 2020). This emerging stream of research is relevant, because individuals' decisions and behaviors are influenced by not only who they are but also their experiences (Li et al., 2022;Morgeson et al., 2015). Prior works suggested that to achieve and manage organizational resilience, leaders must prepare their firms based on their experiences to act in ways that will enable them to endure and survive extraordinary hardships (Coutu, 2002). ...
In this study, we explore how chief executive officers (CEOs) with military experience affect the pre-shock risk taking of firms and thus their organizational resilience to exogenous shocks. We find that the military experience of a CEO is negatively related to the risk taking of a firm before a shock. Furthermore, we find that these pre-shock features promote organizational resilience to shocks, as firms led by CEOs with military experience are more robust and less vulnerable to shocks and can recover from shocks rapidly. This effect is partially mediated by the pre-shock risk taking of firms. We test our hypotheses in the context of the COVID-19 pandemic using a sample of 1,033 CEOs of Chinese listed firms from 2017 to 2020.
... Following the literature, we controlled for several attributes that could affect the results. First, we included firm-level attributes (e.g., Ding & Wu, 2014;Dong et al., 2018;Li et al., 2022) that include Firm size, natural logarithm of total employees; Profitability, net income over total assets; Leverage, total liabilities over total assets; and Book-tomarket ratio, book value over market value of owners' equity. Second, we controlled for ownership structure that included State ownership, equal 1 if the firm is state-owned and 0 otherwise; the proportion of shares owned by the largest shareholder (Top share); institutional investors (Institution share); and top management team (TMT share). ...
... Second, we controlled for ownership structure that included State ownership, equal 1 if the firm is state-owned and 0 otherwise; the proportion of shares owned by the largest shareholder (Top share); institutional investors (Institution share); and top management team (TMT share). Third, we controlled for characteristics at the board level that included proportion of independent directors (Independent directors) (Li et al., 2022;); CEO dual roles (CEO duality; equal to 1 if the CEO is also board chair and 0 otherwise); and proportion of female directors (Female directors). Finally, we controlled for audit quality (Big4), which equals 1 if the firms hired one of the Big Four accounting firms and 0 otherwise; and included year, industry (two-digit code), and region by including dummy variables. ...
... Agency theory states that the stock market, business owners, and securities analysts are examples of external governance systems that can deter managers from acting opportunistically. [28,29] cast doubt on the core tenets of agency theory, contending that external pressure from securities and stock market analysts actually fosters managers' propensity for moral hazard through financial statement falsification. Agency theory states that one of the board of directors' primary responsibilities is to supervise and manage the company's managers [22]. ...
This study aims to determine the effect of governor characteristics on the occurrence of fraudulent activities in the Provincial Government in Indonesia. Gender, age, education level, education background and tenure are used as proxies for the demographic characteristics of governors. Data were collected from the Corruption Eradication Commission, the Supreme Audit Board and Indonesian Corruption Watch and analyzed using panel data regression. The results of this study indicate that the governors with accounting background are more likely not to be involved in fraud, while tenure has no effect on fraud. An interesting finding was obtained that education level and age have a negative effect on fraud. Fraud is higher when the governor is younger and has a lower level of education. This has implications for policy makers in Indonesia in preventing fraud by making regulations that take into account the demographic characteristics of candidates for governor in Indonesia. The results also show that the demographic characteristics of the Governor play an important role in preventing fraud.
... Further, our paper contributes to strategy process research aiming to understand how the media (e.g., Bednar et al., 2022), analysts (e.g., Benner & Ranganathan, 2012), and other stakeholders (e.g., Li et al., 2022) shape strategy formation. While organizations frequently seek out positive coverage (Westphal et al., 2012), our work suggests that organizational hubris is a potential dark side of public adulation that can have long-lasting implications. ...
Research Summary
Although research has explored how executive hubris shapes organizational actions, we theorize that hubris can also develop outside the executive suite. We introduce the construct organizational hubris , which we define as a durable, collective attitude marked by exaggerated pride and confidence in the organization. Organizational hubris differs from executive hubris in terms of level (individual versus collective) and target (self‐focused vs. organization‐focused). We argue that organizational hubris can develop among high‐identification organizations via an external route (positive external attributions) or an internal route (charismatic messaging from top leaders), or both. Once developed, organizational hubris affects important outcomes by shaping (1) how external stakeholders perceive the organization, (2) how insiders treat external stakeholders, and (3) the relationship among internal stakeholders—particularly between employees and top managers.
Managerial Summary
Among the many stories of corporate excess, some organizations exhibit a sense of superiority—the view that success is inevitable and failure impossible—that can shape their very nature. In this article, we depart from the idea that hubris is confined to the C‐suite and introduce the construct organizational hubris , which we define as a durable, collective attitude marked by exaggerated pride and confidence in the organization. Organizational hubris can develop from positive external attributions and/or charismatic messaging from top leaders. Once developed, organizational hubris affects important strategic outcomes by shaping (1) how external stakeholders perceive the organization, (2) how insiders treat external stakeholders, and (3) the relationship among internal stakeholders—particularly between employees and top managers.
... Following the literature (e.g., Campbell et al., 2019;Dong et al., 2018;Li et al., 2022), we control for several factors. At the chair-level, we included the chair's siblings (Siblings), measured as the number of the chair's siblings; the chair's age (Chair age); the chair's education background (Chair education), measured as a categorical variable which we code it as 1 for technical secondary school or less; 2, associate degree; 3, bachelor's degree; 4, master's degree; 5, a PhD degree; and the chair dual roles (Chair duality), which equals 1 if the chair is also the CEO, otherwise 0. ...
In this study, we examine the severe adverse consequences of the top executives’ birth order by exploring how it can adversely influence their firms’ behavior. Drawing on sibling rivalry theory, we posit that board chair birth order is positively related to corporate misconduct, such that firms headed by laterborn chairs have a higher likelihood of misconduct than those headed by earlyborn chairs. This association is weaker when the board chair is a female but stronger when family socioeconomic status is low. We find support for our predictions using a sample of Chinese listed family firms from 2003 to 2020. Our findings provide new insights by elaborating how birth order explains top executives’ misbehavior.
... Firm financial data and data for other variables used in this study were collected from the China Securities Market and Accounting Research (CSMAR) database. These databases have been widely adopted in recent management research using Chinese data (Greve & Zhang, 2017;Li, Shi, Connelly, Yi, & Qin, 2022;Schuler, Shi, Hoskisson, & Chen, 2017). ...
This study provides a behavioral account of opportunistic diversification. We argue that top executives’ social comparison with peer firms based on business segment performance can lead them to increase their investments in high-profitability new businesses (i.e., opportunistic diversification). Specifically, when the performance of a firm's main business relative to its peer firms’ high-profitability business segment falls short of their aspirations, the firm's top executives will engage in problemistic search and subsequently increase opportunistic diversification. This effect is stronger when the firm is similar to peer firms along key firm characteristics and when top executives of the firm are underpaid. Although opportunistic diversification helps improve a firm's short-term accounting performance, it may weaken its long-term performance. Using Chinese non-real-estate firms’ diversification investment in real estate as our empirical context, we find support for our arguments.
... Misconduct is a violation of the law, an organization's values or principles, and universal ethical principles, such as respect, fairness, and honesty (MacLean, 2008). Financial misconduct can have severe consequences, damaging a company's worth and shaking investor trust (Li, Shi, Connelly, Yi, & Qin, 2022). Despite the common assumption that misconduct is primarily associated with cases of bribery and fraud, the most prevalent issues often involve inappropriate behavior in routine interactions (Karjalainen, Kemppainen, & Van Raaij, 2009). ...
Procurement is a complex organizational role encompassing supplier selection, contract definition, and ensuring competitive pricing, quality, and delivery. However, these responsibilities often lead to diverse managerial stereotypes, ranging from passive followers of market dynamics to self-serving negotiators prioritizing personal gain over organizational interests. This chapter presents a unique single-case study on procurement fraud and misconduct, leveraging publicly available data. It explores the intricate nature and consequences of misconduct, including legal penalties, contract losses, and erosion of stakeholder trust. The study identifies control gaps that enable personal gain, and value of integrity-driven culture. Managers play a pivotal role as ethical exemplars, upholding standards, and mitigating risks. In response to misconduct, organizations take decisive action by terminating involved individuals and implementing new procedures, controls, and training programs. The findings underscore the need for continuous vigilance in promoting ethical practices within procurement.
... We controlled for executive characteristics that could influence risk-seeking behavior and analyst perceptions, including CEO age and CEO tenure, CEO compensation (logarithmically adjusted), and CEO awards measured by total awards won from the following outlets Barrons, Business Week, Chief Executive, Electronic Business, Financial World, Forbes, Fortune, Industry Week, Institutional Investor, Morning Star, Time and CNN (Hambrick & Mason, 1984;Harris & Bromiley, 2007;Li et al., 2022). ...
Research Summary
Organizations are punished by analysts and investors when material deceit by their CEO is uncovered. However, few studies examine analysts' responses to deceptive CEOs before their deceit is publicly known. We use machine learning (ML) models to operationalize the likelihood of CEO deception as well as analysts' suspicion of CEO deception on earnings calls. Controlling for analysts' suspicion of deception, we show that analysts are prone to assigning superior recommendations to deceptive CEOs, particularly those deemed as All‐Star analysts. We find that the benefits of CEO deception are lower for habitual deceivers, pointing to diminishing returns of deception. This study contributes to corporate governance research by enhancing our understanding of analysts' reactions to CEO deception prior to public exposure of any fraud or misconduct.
Managerial Summary
Undetected deception by CEOs can impact the stock market by influencing analysts' recommendations. Using an advanced ML model, our study measures the likelihood of deception more accurately than previous methods and identifies a tendency among financial analysts to favor deceptive CEOs, particularly high‐status analysts. However, deception is less effective with analysts who are repeatedly exposed to deception. These findings underscore the importance of awareness of potential deception in CEO communications and the need for continuous scrutiny, learning, and adaptability among analysts.
... First, one's status-related attributes, such as being in a powerful position (De Cremer & Van Dijk, 2005;Malhotra & Gino, 2011), and identity-related attributes, such as a creative role identity (Vincent & Kouchaki, 2016) and organizational identification (Naseer et al., 2020), have been found to be positively related to psychological entitlement. Second, individuals' praiseworthy behaviors, such as OCB (Yam et al., 2017), creative behavior (Ng & Yam, 2019), or volunteering (Loi et al., 2020), and achievements, such as winning a prestigious award (Li et al., 2022), are associated with high psychological entitlement. Third, favorable treatment by an authority, including leader leniency (Zitek & Krause, 2019), leader humility (Qin et al., 2020), or idiosyncratic deals (Liu & Zhou, 2021), has been found to be positively related to employees' entitlement. ...
... Treatment takes the value of one for treatment firms and zero for control firms. The post-award period is coded as one for the year a CEO wins an award and the years after and zero for all years before the award yearconsistent with prior studies (Koh, 2011;Li et al., 2022;Shi et al., 2017). Control firms share the same value in the post-award period as their counterparts with award-winning CEOs. ...
Integrating stakeholder agency theory with the instrumental corporate social responsibility (CSR) literature, this study explores how award-winning CEOs consider personal interests and balance competing stakeholder demands when they decide between external and internal CSR, or CSR focus. Using a difference-in-differences research design, we find that after winning a prestigious media award, CEOs engage in more external CSR, which is more visible to the public, and less internal CSR, which is less likely to attract public attention. We find that such an influence on CSR focus is more salient for award-winning CEOs with lower stock ownership (i.e. a stronger self-serving motivation) than for CEOs with higher stock ownership. Furthermore, we explore the role of stakeholder salience in modifying award-winning CEOs’ decisions about CSR focus. When external stakeholder salience is higher (e.g. higher media coverage), award-winning CEOs' manipulation of CSR focus by increasing external CSR and decreasing internal CSR is more salient. However, such effects can be dampened when internal stakeholder salience is higher (e.g. higher human capital intensity). Our study contributes to the instrumental CSR literature by demonstrating the underlying processes and boundary conditions of how awards affect CEOs' balance of stakeholder salience.
... This suggests a significant difference between the estimated coefficients in the two subsamples. Overall, we find strong support for Hypothesis 5. Finally, we follow the approach used in Li, Shi, Connelly, Yi, and Qin (2022) to visualize these moderating effects (Hypotheses 2 through 5). Figures 2A and 2B illustrate the moderating effect of internationalization on the changes in bribery expenditure across the treatment-and control-group firms after the policy change. ...
Politically connected firms critically rely on their sociopolitical capital to compete; however, a policy-induced loss of board political connections may pose a serious challenge for focal firms and prompt them to develop compensatory moves. Drawing upon resource dependence theory and the nonmarket strategy literature, we examine if and how focal firms may address this challenge through intensifying their bribery activities. Following a year 2013 policy shock that closed the revolving door between former government officials and connected firms in China, we identify a substantial increase of bribery expenditure in a sample of public corporations whose political independent directors were forced by the central government to resign in the subsequent years. Furthermore, we investigate how the strength of this response varies with a host of firm-level contingencies that capture dependence scope and dependence asymmetry in the business-government dyad at the time of the policy announcement. Our study contributes to strategy and governance literatures by demonstrating how firms restructure power relationships after the loss of board political capital. It also sheds light on the regulation of revolving doors under weak institutions by revealing the irony of a well-intentioned “anticorruption” government policy.
... The resulting stream of research established the idea of inducing and motivating employee effort to advance in an organization via steeperthan-average pay structures [3,10]. Accordingly, tournament theory developed, in part, to explain the increasing gap in CEO-to-worker pay [11] and, more generally, the power law distribution of pay across hierarchical levels in organizations [4,12]. ...
Tournament theory posits that some organizations are modeled after sports tournaments whereby individuals are incentivized to compete and win against other members of the organization. A persistent criticism of tournament theory is that rank-order success of employees is entirely dependent on non-interacting or at least non-cooperating entities. To address what part, if any, cooperation plays in competitive tournaments, this study examines the role of social networks in tournament-style promotion and reward systems. Specifically, we seek to identify the importance of social relationships, such as group dissimilarity, initial tie formation, and tie strength in predicting tournament success. Bringing two largely independent research streams together (one focused on cooperation and one framed around competition), we examine how individuals’ performance interacts with their social relationships—their social networks—to influence their chances of winning a tournament. Using the Survivor television series, we analyze the behaviors of 535 interacting contestants across 30 tournaments. In general, the findings help to illustrate how performance and social networks predict tournament advancement. Interestingly, we find that group dissimilarity based on gender, race, and age, largely does not play a role in advancement in the tournaments. Further, the strength of ties fails to mediate between variables such as group dissimilarity and initial tie formation. We conclude by discussing future directions for theoretical and practical exploration of tournament-style promotion systems. Recommendations include continuing to explore and test the role of social dynamics in compensation and promotion systems.
This study investigates whether CEO reputation affects firms' conditional accounting conservatism. We use prestigious CEO awards conferred by authoritative business media as an exogenous shock to increase CEOs' reputations. Based on a difference‐in‐differences empirical design, we find that firms with award‐winning CEOs exhibit significantly lower accounting conservatism after the events compared with firms with non‐award‐winning CEOs. We further show that this effect occurs through the channels of market pressure and CEOs' risk‐taking preferences. We also demonstrate that the baseline result is more significant when the CEO has higher discretion in shaping the firm's accounting policies, when external monitoring is weaker, and when internal control has greater deficiencies. Overall, our results suggest that CEO reputation meaningfully impacts corporate accounting policy.
Research has thus far suggested mixed effects of awards on the behavior of nonwinning firms. We draw from research on interorganizational spillover to study under what conditions state-sponsored awards motivate nonwinning firms to increase their efforts. We contend that, when government officials—an important institutional agent—are under competitive pressure from their own rivals to pursue the state goal, they are more motivated to promote the awards and trigger peer emulation, resulting in interorganizational spillover following the bestowal of awards. In turn, nonwinning firms with a greater need for government-controlled resources are more responsive to the spillover effect promoted by local officials. We test our theory with government awards to firms in China’s state-initiated poverty alleviation program. Analysis of Chinese publicly listed firms from 2016 to 2019 shows that following antipoverty award announcements, nonwinning firms improved their poverty alleviation effort more when their local government officials faced stronger competitive pressure in poverty reduction from their own close-rival officials. Notably, such spillover effects did not occur when local officials faced low competitive pressure. Our study contributes to research on interorganizational spillover and awards as well as how the state can encourage firms to tackle grand challenges.
Research Question/Issue
This study examines firms' reactions to the duration of underperformance. We posit that firms are more likely to engage in misconduct to solve the problem of underperformance as the length of time a firm has been underperforming prolongs. Further, we investigate how divergent external governance actors shape underperforming firms' motivation for misconduct and consequently affect their responses to underperformance duration.
Research Findings/Insights
Using bivariate probit estimations for panel data of 2662 Chinese publicly listed firms during 2007–2018, we uncover that underperformance duration is positively associated with the likelihood of a corporate misconduct commission. In addition, the positive relationship between the duration of firm underperformance and corporate misconduct is mitigated by the level of state ownership but reinforced by the number of analysts covering the firm.
Theoretical/Academic Implications
This study extends the behavioral theory of the firm by incorporating the construct of underperformance duration from a time perspective, which is a proactive signal of firms' illicit decisions. We show that the duration of underperformance is positively associated with the likelihood of corporate misconduct, which is moderated by the firms' external governance actors who have different time pressures to solve financial problems.
Practitioner/Policy Implications
This study offers insights for regulators interested in the prevention of ex‐ant misconduct. Identifying underperformance duration as a critical predictor of illegal activities helps to improve regulators' vigilance. Moreover, a holistic executive evaluation system that shows more tolerance for short‐term underperformance is needed.
We explored the transmission mechanisms of corporate fraud and its punishments within social network communities. Using fraud triangle theory and trust triangle theory, we hypothesize four transmitting channels of how fraud commission and detection are affected by peers’ fraud and punishment. Based on Chinese listed corporations from 2008 to 2018, we first construct and detect interlocked social network communities with a community-detecting algorithm, and then examine hypotheses using a bivariate probit model with partial observability. Our findings indicate that peer-concealing and -hinting effects exist within social network communities. The peer-concealing effect decreases the likelihood of being detected when committing fraud, for those with more and closer fraudulent peers. The peer-hinting effect increases the likelihood of being detected when committing fraud, for those with more and closer punished peers. There is no evidence to support peer-contagion and vicarious-punishment effects. Thus, an improved understanding of the transmission mechanism of corporate fraud commission and detection within communities is provided to prevent and detect corporate fraud. In addition, stakeholders and regulators should be aware of the deviant subculture and social distancing in social network communities.
This study investigates how Chief Executive Officer (CEO) reputation, proxied by receiving prestigious awards, impacts suppliers’ provision of trade credit to a firm. Employing a sample of Chinese public firms, we document that firms managed by award‐winning CEOs receive more trade credit than do propensity score matching matched control firms after the award year. Further analyses suggest that the increased trade credit of firms with reputable CEOs is due to the decreased default risk and information risk associated with those firms. Moreover, the impact of CEOs’ reputations on trade credit varies depending on award rarity, financing needs, CEO characteristics and firm opacity. Overall, our results are consistent with efficient contracting theory and signal theory.
This study examines the impact of social networks on corporate fraud. We contend that firms’ network embeddedness increases the expected cost of fraud, which in turn reduces the likelihood of committing fraud. Using data on the network of Chinese listed firms between 2007 and 2019, we find evidence that firms with a higher degree of network embeddedness are less likely to engage in fraudulent activities, suggesting the governance role of social networks. Further analyses reveal that this negative relationship is stronger when the firm faces more intense market competition, has more interactions with partners, or receives more media coverage. Our findings are robust to instrument variable regression, controlling for firm-fixed effects, alternative measures of network embeddedness, and addressing the partial observation problem. This study provides novel insights into the determinants of corporate fraud from a network perspective.
This study investigated the value of investor communication in a firm's market valuations. The higher the frequency of communication and degree of investor involvement, the greater the increase in firm value. This effect is more prominent in companies with less information transparency, more volatile performance, and investor relations officers holding multiple executive positions and are highly experienced. Furthermore, investor relations (IR) activities can affect market valuations, including liquidity, market visibility, and institutional holdings. This study provided a new approach to measuring IR management and practical implications for governments to actively encourage companies to improve IR.
We demonstrate an unintended consequence of mandatory disclosure of data breaches: the distortion of firms’ real business activities. Employing the staggered adoption of data breach disclosure laws across various U.S. states, we show that mandatory disclosure exacerbates CEOs’ real earnings manipulation through production and operation management, which is more pronounced for firms of which the outbreak of data breaches is more of a concern and under stronger short‐term market pressure. The law adoption is associated with higher stock price crash risk and fewer patenting activities. Our findings reveal side effects of certain customer‐protection regulations in view of dampened information quality. This article is protected by copyright. All rights reserved.
Given its great benefits for individuals, organizations, and societies, creativity has received increasing attention from scholars. However, recent research has provided some initial empirical evidence that creativity has a potential dark side in organizations, such as triggering unethical behavior. At the same time, another stream of research focusing on the antecedents of creativity has revealed that individuals' (un)ethical behavior could influence creativity in intrapersonal and interpersonal ways. To build a useful framework to describe the relationship between creativity and (un)ethical behavior, this chapter reviews and divides the relevant literature into four categories. Specifically, we organize existing studies by considering two dimensions: the causality of creativity and (un)ethical behavior (i.e., the effects of creativity on [un]ethical behavior vs. the effects of [un]ethical behavior on creativity), and the perspective adopted by the research (i.e., intrapersonal vs. interpersonal perspective). Finally, we conclude by discussing promising directions for future research.
The introductory chapter to Creativity and Morality outlines the relationship between the constructs, summarizing the AMORAL model of dark creativity (Kapoor & Kaufman, in press). Specifically, the Antecedents, Mechanisms (individual), Operants (environmental), Realization, Aftereffects, and Legacy of the creative action are theorized and described within the context of general and dark creativity. We present real-life and simulated examples to illustrate the application of the theory across multiple domains, from law enforcement to interpersonal relationships, from the initial idea to the impact of the eventual action. The AMORAL model will help introduce the main concepts that will be addressed in subsequent chapters.
We build upon the approach/inhibition theory of power to explain why and when CFO ranking in top management team (TMT) informal hierarchy may be related to entrepreneurial firm initial public offering (IPO) fraud, a typical type of unethical behavior with potential benefits and costs. Our theory explains why CFOs with high rankings in TMT informal hierarchy tend to have a high level of psychological sense of power and may pay more attention to potential benefits rather than costs of unethical behaviors, resulting in a high likelihood to engage in fraud during IPO process. We further suggest that the positive relationship between CFO ranking in TMT informal hierarchy and entrepreneurial firms IPO fraud is weakened by CEO narcissism (internal environment) and environmental dynamism (external environment), respectively. Based on a sample of Chinese entrepreneurial firms listed in growth enterprise market from 2010 to 2017, we find support for our theoretical predictions. By focusing on the “specialist” executives—CFOs—the findings suggest the need to consider rankings in TMT informal hierarchy when analyzing the antecedents of IPO fraud.
Although corporate social responsibility (CSR) activities may facilitate firms to meet stakeholders' demands and gain legitimacy, there is little understanding of whether and how they may bring in harmful consequences such as chief executive officer (CEO) wrongdoing. We developed a framework to explore how CSR activities lead to CEO wrongdoing based on the fraud triangle of pressure, opportunity, and rationalization. Using a sample of 530 listed firms in China that issued CSR reports between 2011 and 2018, we found a positive relationship between CSR participation and CEO wrongdoing. We also found that this positive relationship is strengthened by firms' internal capability to gain profit and their risk orientation. Our study contributes to the CSR literature by examining the potential dark side of CSR activities, and by bridging stakeholder theory and CEO wrongdoing literature.
In this study, we examine how corporate policies are driven by CEO greed. We hypothesize that greedy CEOs are inclined to implement highly aggressive policies that are beneficial for them but are harmful to shareholders. Specifically, firms with greedy CEOs take excessive risk, make higher investments (R&D and capital expenditure), acquire more debt (both short- and long-term), hoard fewer liquid assets (cash holdings and working capital), and pay less dividend. Using a sample of Chinese firms from 2010 to 2019, the results lend support to our predictions. This work contributes to the literature on upper echelon and agency theory by highlighting how organizational outcomes are influenced by the selfish behavior of greedy CEOs.
This paper studies the impact of corporate misconduct on analyst forecasting accuracy in emerging markets. Using a unique dataset from China, we find that analyst forecasting accuracy decreases when firms are involved in corporate misconduct. We address potential endogeneity by employing the propensity score matched (PSM) procedure and IV regression, and our findings are proven robust. Channel analyses show that corporate misconduct is related to the increased earnings management, weak internal control quality, the reduction in site visits by institutional investors and coverage by star analysts, indicating that our results are driven by a worsened information environment for analysts. Further tests reveal that firms who commit more corporate misconduct, more severe misconduct, or information disclosure violations result in less reliable analyst forecasting accuracy. Thus, our research provides policy implication by showing that corporate irregularities reduce information efficiency of capital market and disrupt the market integrity.
We characterize negative awards. Their pervasiveness in various domains as well as the objectives of their designers and promoters are documented. We discuss the outcomes generated by negative awards and provide some rationales explaining why individuals and organizations may be interested in getting them. Several issues deserve further exploration.
Research Question/Issue
This study attempts to uncover a hidden benefit of shareholders' excess control rights in family firms by examining whether excess control rights can reduce the likelihood of financial misconduct in family firms, compared with nonfamily firms.
Research Findings/Insights
We argue that excess control rights are especially useful for family‐owned firms, compared with firms with other types of ownership, in preventing financial misconduct. They afford family owners the ability to guard against misconduct that can damage the founder's legacy and reduce the family's socioemotional wealth. We also investigate two boundary conditions, the presence of a family member as the board chair and the family's public visibility, that validate our proposed theoretical mechanism. In these scenarios, the family owner's socioemotional wealth is particularly high and could be impacted severely by misconduct. Results from a sample of 2516 publicly traded firms in China support our theory.
Theoretical/Academic Implications
Our study challenges traditional agency theory about excess control rights by exploring the potential of excess control rights to mitigate principal–agent problems and prevent financial misconduct in family firms.
Practitioner/Policy Implications
Regulators who make decisions to forbid or permit excess shareholder control in publicly listed firms must be aware that excess shareholder control could deter financial misconduct in family firms.
Governments and policy makers often adopt big push strategies to help under-developing regions achieve economic growth and shake off poverty. Although numerous studies have documented big push strategies’ positive impacts on indicators of economic development (e.g., poverty rate, unemployment rate, etc.), the current research presents evidence of serious psychological and behavioral drawbacks of such policies. Specifically, we examine China's Great Western Development (GWD) Program as a recent prominent example of a big push strategy, in which approximately 370 million people receive preferential benefits while more than 1 billion people do not. Using a regression discontinuity design based on distance from the boundary of the GWD Program (+/- 100 km), we find that individuals residing in non-GWD regions report higher levels of psychological entitlement compared to their counterparts residing in GWD regions. Furthermore, individuals’ psychological entitlement was positively associated with their selfish behavior and negatively associated with their prosocial behavior. Our results offer initial evidence of the unintended psychological and behavioral consequences of big push strategies.
The Chief Executive Officer (CEO), as the principal leader of the firm, plays an essential role in the prevention of corporate misconduct. While all CEOs have a responsibility to reduce incidents of corporate misconduct, not all are equally effective in doing so. In this study, we propose that given their central role in the inception of the firm, their psychological attachment, and stewardship mentality, founder CEO-led firms exhibit less likelihood and frequency of environmental violations, which are major types of corporate misconduct. Additionally, we explore the possibility that founder CEOs' ability to reduce environmental violations may decline over time as the firm gets older and larger, using insights from organizational life cycle theory. Our analyses of data from major environmental violation incidents among S&P 1500 firms between 2009 and 2018 provide some support for our arguments. Specifically, we found that founder CEO leadership is indeed associated with a reduced likelihood and frequency of environmental violations. Furthermore, we observed that the normally negative relationship between founder CEO leadership and the occurrence of environmental violations turns positive as the firm gets older, consistent with organizational life cycle theory predictions. Implications for research and practice are discussed.
Executives’ status is increasingly recognized as an important factor in firms’ decision-making, while the way executives’ perception of their status influences firms’ strategy is underexplored. Building on insights from both upper echelons and psychological studies, this study investigates the effect of entrepreneurs’ self-perceived social status on firms’ philanthropy. Using a sample of Chinese private firms, we find that entrepreneurs’ self-perceived social status positively affects firms’ donations by drawing their attention to the benefits of philanthropy and enhancing their altruism values. However, such relationships are weakened for entrepreneurs who know about awards related to CSR and firms that join a business association that values CSR; this shows that external information about the value of CSR reduces the effect of entrepreneurs’ self-perceived social status. Our findings highlight the importance of executives’ self-perceived social status, offering important implications for both CSR and upper echelons research.
Considering the background of traditional Chinese culture, which emphasizes that “when we see outstanding people, we should think of emulating them”, and social comparison theory, this study explores how CEO awards impact the R&D investment of award-winning CEOs’ competitors. The results show that award-winning CEOs’ competitors increase R&D investment in the postaward period relative to the preaward period. We further find that CEO awards’ “gold content”, the social attention of award-winning CEOs’ competitors, the similarity between award-winning CEOs and their competitors, and industry competitive pressure are important factors affecting the size of ripple effects. Empirical evidence also shows that the intraindustry ripple effects of CEO awards significantly improve the firm performance and value of competitors. In a robustness test, we confirm CEO awards’ intraindustry ripple effects from the perspective of the number of patent applications. The ripple effects of CEO awards are still valid after using PSM-DID to alleviate endogeneity problems and considering the right-side distribution of R&D investment.
Many companies prominently espouse their virtuous character in communications with investors, with a view toward influencing investor perceptions about the firm’s standards of behavior. While there are benefits to investors perceiving an organization to be virtuous, what happens if the firm violates those standards by engaging in unethical behavior? In this study, we use expectancy violations theory to argue that virtue rhetoric sets investors up for disappointment. When an organization claims to be virtuous but then acts unethically, investors respond to the ethics violation more negatively than they would otherwise. We also theorize about scenarios where investors may overlook unethical behavior or intensify their disapproval of it. To test our ideas, we assemble a unique sample of unethical events committed by S&P 500 companies over a 12-year period, combined with analysis of the virtue rhetoric found in their annual letters to shareholders. Our main finding is that investor reaction to unethical behavior is more negative for companies that claimed to be virtuous prior to the violation than for those that did not make such claims. This relationship is less strong when the company has high expected future value.
Extant research has uniformly demonstrated that leader humility is beneficial for subordinates, teams, and even organizations. Drawing upon attribution theory, we challenge this prevailing conclusion by identifying a potential dark side of leader humility and suggesting that leader humility can be a mixed blessing. We propose that the effects of leader humility hinge on subordinates' attributions of such humble behavior. On the one hand, when subordinates attribute leader humility in a self-serving way, leader humility is positively associated with subordinate psychological entitlement, which in turn increases workplace deviance. On the other hand, when subordinates do not attribute leader humility in a self-serving way, leader humility is positively associated with leader-member exchange, which in turn decreases workplace deviance. We found support for our hypotheses across a field study and an experiment. Taken together, our findings reveal the perils and benefits of leader humility and the importance of examining subordinate attributions in this unique leadership process. (PsycINFO Database Record (c) 2019 APA, all rights reserved).
Wrongdoing, and specifically that which is committed by top executives, has attracted scholars for decades for a number of reasons. Among them, the consequences of wrongdoing are widespread for organizations and the people in and around them. Due to the vast array of consequences, there continues to be new questions and additional scholarly attempts to uncover why it occurs. In this review, we build upon previous efforts to synthesize the body of literature regarding the antecedents of CEO wrongdoing utilizing a framework that sheds light on the status of the literature and where unanswered questions remain. We apply the Fraud Triangle, a framework drawn from the accounting literature, to derive conclusions about what we know about the pressures faced by CEOs, the opportunities afforded to CEOs to commit wrongdoing, and contributing factors to a CEO’s ability to rationalize misbehavior. We organize the literature on these conceptual antecedents of CEO wrongdoing around internal (e.g., compensation structure and organizational culture) and external (e.g., shareholder pressure and social aspirations) forces. In doing so, we integrate findings from a variety of disciplines (i.e., accounting, finance, and sociology) but remain focused on management scholarship since the last review of organizational wrongdoing to provide an updated state of the literature. This review offers a clear framework and a common language; it highlights gaps in the literature and specific directions for future research with the ultimate goal of understanding why CEOs engage in wrongdoing.
We develop a new explanation for why some organizations are relatively evenhanded, while others are more disparate, in allocating resources to subunits. Recognizing the central role of chief executive officers (CEOs) in resource allocation, we argue that CEOs’ personal values regarding egalitarianism, as manifested in their political ideologies, will lead to different allocation styles. Liberal CEOs will favor evenhandedness, while conservatives will tolerate greater disparities. Placing this primary expectation in a social context, we then argue that the effects of a CEO’s values are amplified when aligned with the prevailing ideology among organizational members, and conversely are muted when misaligned. Then, examining how instrumental incentives moderate the enactment of CEO values, we envision motivated cognition as a potent psychological process, which leads CEOs to “double down” on their personal values when they have more to gain or lose (when pay is more equity-based or the CEO has larger shareholdings). Finally, we consider the implications of our values-based framework for firm performance, arguing that evenhanded allocations are beneficial when organizational ideology is liberal, but harmful when the organization leans conservative. We test our ideas on a sample of multibusiness firms, using personal political donations to capture ideologies. We find considerable support for our hypotheses.
We set forth a new theory for understanding the consequences of CEO celebrity. The fulcrum of our theory is the reality that CEOs attain celebrity because they are cast into specific archetypes, rather than for their general achievements. We present a typology of common celebrity CEO archetypes (creator, transformer, rebel, savior) and then detail a model highlighting the consequences associated with attaining celebrity of a given type. These consequences include an array of sociocognitive outcomes, which, in turn, constrain celebrity CEOs to those behaviors associated with their particular celebrity
archetype. The sociocognitive outcomes’ main effects are moderated by the role intensity of the specific archetype, the CEO’s degree of narcissism, and the temporal arc (rate of ascent and duration) of celebrity. Finally, we argue that the effects of CEO celebrity on firm performance are contingent on the continuity of external and internal
contextual conditions. If conditions change appreciably, the celebrity CEO’s rigidities become severe liabilities, explaining the documented tendency for CEO celebrity to bring about, on average, unfavorable firm outcomes.
Institutional theory has explained the greater prevalence of many strategic actions by increases in their legitimacy over time, but it has not explained how firms choose among actions backed by competing institutional logics. We address this topic by linking institutional logics with the theory of organizational coalitions and power to predict how such choices are affected both by external influence (through ownership) and by internal influence (through shared decision making). In particular, we analyze how the old state socialism logic and the new market capitalism logic competed to influence Chinese firms' mergers and acquisitions (M&As). We find that these institutional logics affected M&A decisions via the coalitions committed to each logic - coalitions whose balance of power reflected the external power source of ownership and the internal power source of board representation. We also find that each coalition's strength changed as the market capitalism logic became more established during China's economic transition, and that investors viewed M&As by firms with high state ownership skeptically.
Significance
Competition is prevalent. People often resort to unethical means to win (e.g., the recent Volkswagen scandal). Not surprisingly, competition is central to the study of economics, psychology, sociology, political science, and more. Although we know much about contestants’ behavior before and during competitions, we know little about contestants’ behavior after the competition has ended. Connecting postcompetition behaviors with preceding competition experience, we find that after a competition is over winners behave more dishonestly than losers in an unrelated subsequent task. Furthermore, the subsequent unethical behavior effect seems to depend on winning, rather than on mere success. Providing insight into the issue is important in gaining understanding of how unethical behavior may cascade from exposure to competitive settings.
This article describes new micro-foundations for theorizing about executive compensation, drawing on the behavioral economics literature and based on a more realistic set of behavioral assumptions than those that have typically been made by agency theorists. We call these micro-foundations “behavioral agency theory.” In contrast to the standard agency framework, which focuses on monitoring costs and incentive alignment, behavioral agency theory places agent performance at the center of the agency model, arguing that the interests of shareholders and their agents are most likely to be aligned if executives are motivated to perform to the best of their abilities. We develop a line of argument first advanced by Wiseman and Gomez-Mejia and put the case for a more general reassessment of the behavioral assumptions underpinning agency theory. A model of economic man predicated on bounded rationality is proposed, adopting Wiseman and Gomez-Mejia’s assumptions about risk preferences, but incorporating new assumptions about time discounting, inequity aversion, and the trade-off between intrinsic and extrinsic motivation. We argue that behavioral agency theory provides a better framework for theorizing about executive compensation, an enhanced theory of agent behavior, and an improved platform for making recommendations about the design of executive compensation plans.
While research on the disclosure of CSR (corporate social responsibility) recognizes the influence of government regulations and guidelines, less attention has been given to the co-existence of conflicting pressures from the state. We develop a framework wherein CSR reporting is viewed as an organizational response to institutional complexity that arises from the conflicting demands from the central government and local governments, and apply it to publicly listed firms in China after the central government agencies issued guidelines on CSR reporting. Some provincial governments' high priority given to short-term GDP growth created tension with the central government's expectations on CSR reporting. Firms with attributes that increase scrutiny from both institutional constituencies experienced heightened tension, and they responded with early adoption but low-quality reports. Our framework was supported through a longitudinal analysis between 2008 and 2011. Our study contributes to the literature on CSR disclosure by uncovering the impact of conflicting government pressures, and advances research on institutional complexity by identifying a specific decoupling response.
Whatever organizational theory one considers, organization and management are viewed as means to motivate and coordinate individuals most efficiently so as to direct all their competences and efforts to the organization’s goals. For instance, early concepts such as Scientific Management proposed selecting the best workers, assigning them to the most appropriate tasks, and using money as a predominant motivator (e.g., Locke, 1982). Despite fierce criticism, especially from advocates of the Human Relations movement, monetary incentives are still considered by scholars and practitioners alike as prime motivators of individual behavior and performance. Studies and publications focusing – on the one hand – on single problems and issues of motivating workers and managers by means of money to work hard, and rewarding them for their productive contribution, or – on the other hand – on developing the optimal compensation schemes are overwhelming. Explaining existing compensation structures, analyzing normative properties of alternative compensation schemes, and determining efficient executive compensation systems are at the center of personnel and organizational economics (e.g., Lazear, 1999; Encinosa, Gaynorb, and Rebitzer, 2007; Lazear and Shaw, 2007). This literature analyzes the motivational effects of compensation and reward systems at the organizational level, and predominantly emphasizes the need to increase shareholder interests by defining and applying optimal employment contracts and efficient pay structures (e.g., Becker and Huselid, 1992). Of special interest among neoinstitutional economists and organizational theorists is the theory of tournaments, as it provides a rigorous formal model to explain the phenomenon of disproportionate executive compensation, for instance.
Resource dependence theorists argue that boards of directors with political capital can benefit focal firms by reducing uncertainty and providing preferential resources. Here, we develop theory regarding the downside of
board political capital. As the principal-principal agency problem characterizes many parts of the world, we argue that board political capital can exacerbate this problem by enabling large blockholders to undertake
more appropriation of firm wealth. Further, we explore how this enabling effect is moderated by ownership-, industry-, and environment-level contingencies. We find empirical support for our arguments using 32,174
directors in 1,046 Chinese listed firms over the period 2008 – 2011. Our study sheds light on new ways in which resource dependence and agency theories can be integrated to advance the extant research on board
governance and corporate political strategy.
We examine how board members’ reactions following financial misconduct differ from those following other adverse organizational events, such as poor performance. We hypothesize that inside directors and directors appointed by the CEO may be particularly concerned about their reputation following deceptive financial practices. We demonstrate that directors more closely affiliated with the CEO are more likely to reduce their support for the CEO following financial misconduct, increasing the likelihood of CEO replacement. Enactment of the Sarbanes-Oxley Act similarly alters governance dynamics by creating a greater expectation for sound corporate governance. We demonstrate our findings in U.S. public firms that restated their financial earnings during a twelve-year period before and after the passage of Sarbanes-Oxley.Managerial SummaryGiven past concerns about lack of oversight by boards of directors leading to firm financial misconduct, we examine how the relationship between directors and CEOs may be altered in the face of such misconduct. We argue that directors most closely tied to the CEO (inside board members and board members appointed by the CEO), typically the most supportive of the CEO, may become most concerned about their own reputation following financial misconduct. We find that CEOs receive less support from these directors, a finding in contrast to past studies demonstrating that such board members tend to shield CEOs following poor performance. These findings are accentuated following the passage of the Sarbanes-Oxley Act, which placed greater responsibility on the CEO for the accuracy of financial reports.
This article proposes that key CEO demographic factors reflect alternative modes of rationalizing the choice to engage in and/or facilitate accounting fraud. Specifically the authors theorize that younger, less functionally experienced CEOs and CEOs without business degrees will be more likely to rationalize accounting fraud as an acceptable decision. Based on a sample of 312 fraud-committing and control firms, the study finds support for the authors' predictions. It also finds that CEO stock options (a form of executive equity incentive) also predict fraud, and that this relationship is not moderated by CEO demographics. The study thus extends upper echelon theory by demonstrating how key demographic variables influence CEO decisions to rationalize accounting fraud.
Tournament theory is useful for describing behavior when reward structures are based on relative rank rather than absolute levels of output. Accordingly, management scholars have used tournament theory to describe a wide range of inter- and intraorganizational competitions, such as promotion contests, innovation contests, and competition among franchisees. While the use of tournament theory has gained considerable momentum in recent years, the ideas that underlie the theory have become blurred and potentially useful insights remain trapped within disciplines. We, therefore, provide a synthesis of the theory's foundational concepts, review its use in the management literature, identify advancements from related disciplines that may be imported to management research, and delineate the steps likely to be critical to moving the theory forward. Our hope is this review will make tournament theory more accessible and salient to management researchers with a view toward developing more nuanced versions of the theory and applying it in a wider range of contexts.
Research summary
We propose that CEO dismissal can change the strategic decision‐making of CEOs at competing firms. Competitor CEOs will experience an increase in job insecurity, which motivates them to refrain from strategic risk taking. We also identify two key boundary conditions that shape the influence of CEO dismissal on competitor CEOs’ risk taking. We test our ideas on a sample of CEO dismissals among S&P 1500 firms using a novel synthetic control method approach to matching. We also test the underlying theoretical mechanism using a complementary experiment on top executives. Taken together, these studies advance CEO dismissal research by investigating the spillover effect of CEO dismissal on competitor CEOs’ behaviors.
Managerial summary
The position of CEO is more volatile today than ever. When it comes to pulling the trigger on CEO dismissal, companies have increasingly twitchy fingers. Therefore, it seems important to ask: when a company fires their CEO, what happens at all the other companies in the industry? We suggest the CEOs at those companies will start worrying about their job. This fear affects their strategic decision‐making. They dial back on risk and let opportunities for growth slip away. This is especially true for certain competitors and ownership structures. Firing a CEO, therefore, has ripple effects throughout the whole industry.
This article is protected by copyright. All rights reserved.
Research question/issue
This study attempts to shed new light on how the state as a controlling shareholder can affect the interests of minority shareholders by investigating the role of state ownership in deterring securities fraud commission.
Research findings/insights
Using archival data from a large sample of Chinese publicly traded firms, we uncover that state ownership is negatively associated with the likelihood of securities fraud commission. Further, CEO political background reinforces this negative relationship. We also uncover that firms with high state ownership are more likely to dismiss CEOs than those with low or no state ownership upon securities fraud detection.
Theoretical/academic implications
Departing from agency theory‐centric research on state ownership and corporate governance, this study introduces a political governance perspective to unpack the role of state ownership in corporate governance. Political governance refers to organizational control mechanisms deployed by political actors to achieve their objectives.
Practitioner/policy implications
Studying how political governance systems influence managerial behaviors is critical to gaining a complete insight into the implications of state ownership on corporate governance.
Despite extensive academic research on how to identify competitors objectively, marketers know relatively little about how managers identify competitors in practice. The authors bring together diffuse literature in this area and propose a cognitive framework for managerial identification of competitors. They report the results of two studies that examine the attributes managers use in deciding who their competitors are.
Research summary
We examine the influence of CEOs’ military background on financial misconduct using two distinctive datasets. First, we make use of accounting and auditing enforcement releases (AAER) issued by the U.S. Securities and Exchange Commission (SEC), which contain intentional and substantial cases of financial fraud. Second, we use a dataset of “lucky grants,” which provide a measure of the likelihood of grant dates of CEOs’ stock options having been manipulated. Results for both datasets indicate that CEOs who served in the military are less inclined to be involved in fraudulent financial reporting and to backdate stock options. In addition, we find that these relationships are moderated by board oversight (CEO duality and independent directors in the board).
Managerial summary
CEOs who formerly served in the U.S. military are prevalent among U.S. firms. The military puts strong emphasis on the obedience of its personnel. In this study, we test if time spent in the military leads individuals to be more obedient to rules and regulations in the years after they have left the military and become CEOs. Our findings strongly suggest that CEOs who served in the U.S. military are less likely to be involved in financial misconduct. We also find evidence that tougher board oversight strengthens this relationship. Our findings have implications for regulators, auditors, practitioners, and researchers who are interested in determinants of and mechanisms to prevent fraud and stock option backdating.
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Financial misconduct (FM) rates differ widely between major U.S. cities, up to a factor of three. Although spatial differences in enforcement and firm characteristics do not account for these patterns, city‐level norms appear to be very important. For example, FM rates are strongly related to other unethical behavior, involving politicians, doctors, and (potentially unfaithful) spouses, in the city.
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Research on the impact of CEO attributes on firm performance is sporadic and fragmented, with various studies addressing select pieces of the puzzle. Through synthesizing and integrating diverse theoretical perspectives on the functioning of firm executives, this article advances a sequential mediation process model to link CEO attributes with firm performance. The model incorporates CEO emotion and cognition, along with top management team (TMT) and organizational processes as multilevel mediating mechanisms linking CEO attributes to firm performance outcomes. In addition, we draw from event system theory to highlight contextual events confronting firms and CEOs that alter the sequential mediation process resulting in stronger/weaker effects of CEOs on firm performance. Our research not only extends the literature by addressing what, how, and when CEO attributes impact firm performance in a more holistic fashion but also identifies meaningful theoretical and methodological opportunities for research advancement.
Purpose
Based on the findings of Aguinis et al. (2017) that only a few executives are properly compensated, we examine potential causes and consequences of CEO overpayment and underpayment. Ineffective compensation of the CEO represents a governance failure by the board of directors. Better understanding the reasons for such failures may help boards to correct their processes and to enact more effective governance. Boards must look beyond the normally constrained focus of agency theory to examine executive characteristics and motivation. Thus, tailoring compensation plans and governance to the executive and organizational context requires attention to a broader set of theoretical notions.
Design/methodology/approach
Using the Aguinis, et al (2017) work, we conceptually identify and explain the causes and consequences of CEO overpayment and underpayment along with their implications for governance and future research
Findings
We identify potential reasons for CEO overpayment and underpayment. For example, in addition to poor hiring decisions and inadequately designed compensation plans, CEO overpayment can occur because of executive hubris and greed. Alternatively, CEO underpayment may occur because of a poorly designed plan, inadequate information about the external labor market and the executive’s interests in non-pecuniary benefits (e.g., socio-emotional wealth, altruism). Without proper monitoring and oversight by the board, firm performance commonly suffers.
Originality/value
This work extends our understanding of why CEOs may be overpaid (e.g., hubris, greed) and why some executives may accept underpayment (e.g., desire for non-pecuniary benefits from SEW or altruism). We explain the consequences of ineffective corporate governance practices that allow inefficient CEO compensation. Finally, we explore several contingencies that can affect the governance practices and research needed to enhance our knowledge of this important area.
This paper examines how organizational changes of market position are motivated by comparison of organizational performance with historical and social aspiration levels and facilitated by change experience and observed changes by competitors. The analysis supports all effects and gives evidence on the form of aspiration-level effects on risk taking.
We formulate theory and set forth a first-ever empirical analysis of the impact of board of director gender diversity on the broad spectrum of securities fraud, generating three main insights. First, the examined data show strong evidence consistent with the view that the importance of women on boards in mitigating securities fraud lies in the mechanism of diversity itself, such that the optimal percentage of women on boards is 50% with respect to minimizing securities fraud. We find less direct support for the alternative proposition that women are more ethically sensitive and less likely to risk committing fraud, such that the optimal percentage of women on boards would be 100% with respect to mitigating securities fraud. Second, we show that the market response to fraud from a more gender-diverse board is significantly less pronounced. Third, we show that women are more effective in mitigating both the presence and severity of fraud in male-dominated industries, which again supports the notion of diversity. All our findings are robust to controls for endogeneity and propensity score matching, among other robustness checks.
We investigate the reputational impact of financial fraud for outside directors based on a sample of firms facing shareholder class action lawsuits. Following a financial fraud lawsuit, outside directors do not face abnormal turnover on the board of the sued firm but experience a significant decline in other board seats held. This decline in other directorships is greater for more severe allegations of fraud and when the outside director bears greater responsibility for monitoring fraud. Interlocked firms that share directors with the sued firm exhibit valuation declines at the lawsuit filing. Fraud-affiliated directors are more likely to lose directorships at firms with stronger corporate governance and their departure is associated with valuation increases for these firms.
Research summary : This study proposes that CEOs may undertake intensive acquisition activities to increase their social recognition and status after witnessing their competitors' winning CEO awards. Using a sample of U.S. S&P 1,500 firm CEOs, we find that CEOs engage in more intensive acquisition activities in the period after their competitors won CEO awards (i.e., postaward period), compared to the preaward period. Moreover, this effect is stronger when focal CEOs themselves had a high likelihood of winning CEO awards. Our findings also show that acquisitions by focal CEO firms in the postaward period realize lower announcement returns compared to acquisitions by the same CEOs in the preaward period .
Managerial summary : Each year a few CEOs receive CEO awards from business media and CEOs who receive such awards become instant celebrities, that is, superstar CEOs. This study explores how superstar CEOs' competitors react to not winning CEO awards. We find that superstar CEOs' competitors undertake more intensive acquisition activities in the postaward period compared to the preaward period. This is particularly true for competitors who were close, yet did not win CEO awards. In addition, acquisitions by superstar CEOs' competitors are associated with lower announcement returns in the postaward compared to the preaward period. These findings collectively indicate that acquisitions may be used as a channel for superstar CEOs' competitors to elevate their own social status, but at a cost to shareholders . Copyright © 2017 John Wiley & Sons, Ltd.
We study how firms differ from their competitors using new time-varying measures of product similarity based on text-based analysis of firm 10-K product descriptions. This year-by-year set of product similarity measures allows us to generate a new set of industries in which firms can have their own distinct set of competitors. Our new sets of competitors explain specific discussion of high competition, rivals identified by managers as peer firms, and changes to industry competitors following exogenous industry shocks. We also find evidence that firm R&D and advertising are associated with subsequent differentiation from competitors, consistent with theories of endogenous product differentiation.
R esearch summary : Agency theory suggests that external governance mechanisms (e.g., activist owners, the market for corporate control, securities analysts) can deter managers from acting opportunistically. Using cognitive evaluation theory, we argue that powerful expectations imposed by external governance can impinge on top managers' feelings of autonomy and crowd out their intrinsic motivation, potentially leading to financial fraud. Our findings indicate that external pressure from activist owners, the market for corporate control, and securities analysts increases managers' likelihood of financial fraud. Our study considers external governance from a top manager's perspective and questions one of agency theory's foundational tenets: that external pressure imposed on managers reduces the potential for moral hazard .
M anagerial summary : Many of us are familiar with stories about top managers “cooking the books” in one way or another. As a result, companies and regulatory bodies often implement strict controls to try to prevent financial fraud. However, cognitive evaluation theory describes how those external controls could actually have the opposite of their intended effect because they rob managers of their intrinsic motivation for behaving appropriately. We find this to be the case. When top managers face more stringent external control mechanisms, in the form of activist shareholders, the threat of a takeover, or zealous securities analysts, they are actually more likely to engage in financial misbehavior . Copyright © 2016 John Wiley & Sons, Ltd.
This paper uses data from an attendance award program implemented at one of five industrial laundry plants to show the complex costs of corporate awards previously ignored in the literature. We show that although the attendance award had direct, positive effects on employees who previously had punctuality problems, it also led to strategic gaming behavior centered on the specific eligibility criteria for the award. The award program temporarily changed behavior in award-eligible workers but did not habituate improved attendance. Furthermore, we show that the extrinsic reward from the award program crowded out the internal motivation of those employees who had previously demonstrated excellent attendance, generating worse punctuality during periods of ineligibility. Most novelly, we show that the attendance award program also crowded out internal motivation and performance in tasks not included in the award program. Workers with above average pre-program attendance lost 8% efficiency in daily laundry tasks after the program's introduction. We argue that these motivational spillovers result from the perceived inequity of internally motivated workers' previously unrewarded superior attendance contributions. Our paper suggests that even purely symbolic awards can generate gaming and crowding out costs that may spill over to other important tasks.
Research summary : This study examines the relationship between an independent director's death and CEO acquisitiveness. Using a sample of large U.S. public firms, we find that CEOs who have experienced an independent director's death undertake fewer acquisitions in the post‐director death period, in particular fewer large acquisitions. Our findings are consistent with the prediction of posttraumatic growth theory that mortality awareness can induce CEOs to reevaluate their life priorities and reduce the importance of extrinsic goals in their decision making. This study contributes to the strategic leadership literature by highlighting the influence of the death of CEOs ' social peers on CEOs ' strategic decisions .
Managerial summary : Does the death of CEOs ' social peers influence CEOs ' strategic decisions? We find that CEOs who have experienced an independent director's death engage in fewer acquisitions in the post‐director death period, in particular fewer large acquisitions. One likely explanation for our findings is that the death of an independent director may heighten CEOs ' mortality awareness, lead the CEOs to pursue a quieter life, and weaken their propensities for undertaking decisions (i.e., acquisitions) that increase their compensation and social status . Copyright © 2016 John Wiley & Sons, Ltd.
Research has consistently demonstrated that organizational citizenship behaviors (OCBs) produce a wide array of positive outcomes for employees and organizations. Recent work, however, has suggested that employees often engage in OCBs not because they want to but because they feel they have to, and it is not clear whether OCBs performed for external motives have the same positive effects on individuals and organizational functioning as do traditional OCBs. In this article, we draw from selfdetermination and moral licensing theories to suggest a potential negative consequence of OCB. Specifically, we argue that when employees feel compelled to engage in OCB by external forces, they will subsequently feel psychologically entitled for having gone above and beyond the call of duty. Furthermore, these feelings of entitlement can act as moral credentials that psychologically free employees to engage in both interpersonal and organizational deviance. Data from two multisource field studies and an online experiment provide support for these hypotheses. In addition, we demonstrate that OCB-generated feelings of entitlement transcend organizational boundaries and lead to deviance outside of the organization.
Research summary: This article draws on identity control theory and a study of acquisition premiums to explore how CEO celebrity status and financial performance relative to aspirations affect firm risk behavior. The study finds that celebrity CEOs tend to pay smaller premiums for target firms, but these tendencies change when prior firm performance deviates from the industry average returns, thereby leading these CEOs to pay higher premiums. The study also finds that the premiums tend to be even larger when celebrity CEOs have more recently attained celebrity status. Taken together, these findings contribute to identity control theory and CEO celebrity literatures by suggesting that celebrity status is a double‐edged sword and that the internalization of celebrity status by CEOs strongly influences the decision‐making of CEOs .
Managerial summary: The purpose of this article is to examine how CEO celebrity status and financial performance relative to aspirations affect the size of acquisition premiums. The study finds that celebrity CEOs tend to pay smaller premiums for target firms. However, when celebrity CEOs ' prior firm performance is either better or worse than the industry average, these CEOs pay higher premiums. This situation is exacerbated when the CEO has only recently been crowned a celebrity. In effect, these CEOs feel great pressure to match the inflated performance expectations that come with celebrity status. These findings suggest that being a celebrity is a double‐edged sword. The implication here is that CEOs who have recently been crowned a celebrity should be aware of these pressures and cope accordingly. Copyright © 2015 John Wiley & Sons, Ltd.
Knowledge generation is key to economic growth, and scientific prizes are designed to encourage it. But how does winning a prestigious prize affect future output? We compare the productivity of Fields Medal recipients (winners of the top mathematics prize) to that of similarly brilliant contenders. The two groups have similar publication rates until the award year, after which the winners' productivity declines. The medalists begin to "play the field," studying unfamiliar topics at the expense of writing papers. It appears that tournaments can have large postprize effects on the effort allocation of knowledge producers. © 2015 by the Board of Regents of the University of Wisconsin System.
We examine when and why creative role identity causes entitlement and unethical behaviors, and how this relationship might be reduced. We found that the relationships among creative identity, entitlement, and dishonesty are contingent on the perception of creativity being rare. Four experiments showed that individuals with a creative identity reported higher psychological entitlement and engaged in more unethical behaviors. Additionally, when participants believed that their creativity was rare rather than common, they were more likely to lie for money. Moreover, manipulation of the rarity of creative identity, but not of practical identity, increased psychological entitlement and unethical acts. We tested for the mediating effect of psychological entitlement on dishonesty using both measurement of mediation and experimental causal chain approaches. We further provide evidence from organizations. Responses from a sample of supervisor-subordinate dyads demonstrated that employees reporting strong creative identities who perceived creativity as rare in their work group, rather than common, were rated as engaging in more unethical behaviors by their supervisors. This paper extends prior theory on negative moral consequences of creativity by shedding new light on assumptions regarding the prevalence of creativity and the role psychological entitlement plays.
I investigate whether corporate accountability reporting helps protect firm value. Specifically, I examine (1) whether corporate accountability reporting helps firms prevent the occurrence of high-profile misconduct (e.g., bribery, kickbacks, discrimination), and (2) whether prior corporate accountability reporting reduces the negative stock price reaction when high-profile misconduct does occur. Using multiple methods to address self-selection, I find that, on average, firms that report on their corporate accountability activities are less likely to engage in high-profile misconduct, consistent with the reporting process helping firms to manage their operations better. Additionally, I find that when high-profile misconduct does occur, firms that have previously issued corporate accountability reports experience a less negative stock price reaction, consistent with corporate accountability reports influencing perceptions of managerial intent, which, in turn, influences expected punishments.
Why might high-status organizations, presumably secure in their positions, resort to illegality? This study considers the possibility that status theory might have overestimated the relative security of high-status organizations. We examine our theory that an inability to meet associates' expectations about quality might be the source of insecurity, using data on the illegal loan recovery practices employed by commercial banks in India between 2005 and 2009. High-status banks were found to be particularly likely to engage in illegal recovery practices. This was especially true when a high-status bank had experienced a decline in its financial asset quality or had fallen behind the financial asset quality of its peers. However, when a bank's business partners placed greater emphasis on corporate social responsibility (CSR), it minimized a bank's tendency to resort to illegal loan recovery practices.
Awards are a widespread phenomenon. They cater to the fundamental desire for social recognition and serve as a valuable incentive to influence behaviour. The study of awards such as medals, prizes and titles has in recent years gained momentum in economics, complementing the longstanding focus on material incentives. To evaluate the effectiveness of awards as a motivator is difficult as the effect of awards must be separated from the fact that awards are meant to be given to the best. We show how research on awards has advanced over the last couple of years, thus providing points of departure for future work.
Research summary : Awards are a valuable strategic resource. Motivation theory and the emerging body of empirical literature suggest that awards can have a significant effect on employee motivation and corporate performance, though not always in the intended direction. Awards can also destroy value. The organizational award literature has so far largely neglected this important issue. We develop a synthesis of the dimensions critical for successful award bestowals, and analyze under which conditions awards generate firm‐specific value that is sustained and difficult for competitors to imitate. The process of value creation and capture is contingent on the given firm's organizational characteristics and nature of production. The article concludes by laying out empirical implications. JEL codes: M52, M54, J24, J30.
Managerial summary : Awards are widely used in the corporate sector. They fundamentally differ from monetary incentives, which risk crowding out employees' intrinsic motivation. Among the variety of awards, two general types can be distinguished: confirmatory awards based on explicit, pre‐determined performance criteria, and discretionary awards, which rely on broad performance evaluations and may be used ex post to honor outstanding performance. Appropriately designed and adjusted to the specific firm's characteristics, awards enhance employees' motivation and corporate performance. They express recognition and support their recipients' perceived competence and social status. Awards help to retain valuable employees and to establish role models. However, awards may also backfire, for instance, when they provoke envy among coworkers. We propose when awards risk destroying value and when they are particularly useful . Copyright © 2015 John Wiley & Sons, Ltd.
We unpack the concept of managerial risk taking, distinguishing among three of its major elements: the size of an outlay, the variance of potential outcomes, and the likelihood of extreme loss. We then apply our framework in hypothesizing the effects of CEO stock options on strategic behavior and company performance. We find that CEO stock options engender high levels of investment outlays and bring about extreme corporate performance (big gains and big losses), suggesting that stock options prompt CEOs to make high-variance bets, not simply larger bets. Finally, we find that option-loaded CEOs deliver more big losses than big gains.
We synthesize academic literature related to fraudulent financial reporting with dual purposes: (1) to better understand the nature and extent of the existing literature on financial reporting fraud, and (2) to highlight areas where there is need for future research. This project extends the work of Hogan et al. (2008), who completed a similar synthesis project, also sponsored by the Auditing Section of the American Accounting Association, in 2005. We synthesize the literature related to fraud by examining accounting and auditing literature post-Hogan et al. (2008) and by summarizing relevant fraud literature from outside of accounting. We review publications in accounting and related disciplines including criminology, ethics, finance, organizational behavior, psychology, and sociology. We synthesize the research around a model that illustrates the auditor's approach to fraud. The model incorporates auditors' use of the fraud triangle (i.e., management's incentive, attitude, and opportunity to commit fraud), their assessment of the existence and effectiveness of the client's anti-fraud measures (e.g., corporate governance mechanisms and internal controls), and their consideration of possible fraud schemes and concealment techniques when making an overall fraud risk assessment of the client. The model further illustrates how auditors can incorporate this assessment into an overall strategy to detect fraud by implementing appropriate fraud-detection procedures. We summarize the recent literature of each component of the model and suggest avenues for future research.
Research summary: Tournament theory suggests that a large gap in pay between CEOs and top managers can provide incentives to perform, but we argue that it can also elicit negative effort and even motivate the kind of behavior that leads to lawsuits. We posit that this negative effort is greater when firms have high levels of unrelated diversification because there is less operational interdependency, so tournament effects are stronger. We also contend that the influence of tournament incentives on behavior leading to lawsuits is weaker when environmental uncertainty is high. We discuss the consequences of these findings for research on fraud and tournament theory as well as the practical repercussions for firms, investors, and policymakers.
Managerial summary : Each year, the press has a field day when companies announce the outsized compensation packages laid out for CEOs . Economists use “tournament theory” to describe how high CEO pay motivates everyone else to work hard to get into the top job. The problem with this approach is that, yes, top managers work harder when the gap between their and the CEO 's pay increases, but as that gap widens, it also incentivizes top managers to cheat or cut corners. As a result, we find that the gap between CEO and top manager compensation predicts the likelihood that shareholders will file a securities class action lawsuit against the company. This gap in pay is an especially good predictor of lawsuits for highly unrelated diversified companies and companies facing a low level of external uncertainty . Copyright © 2015 John Wiley & Sons, Ltd.
Why does past moral behavior sometimes lead people to do more of the same (consistency), whereas sometimes it liberates them to do the opposite (licensing)? We organize the literature on moderators of moral consistency versus licensing effects using five conceptual themes: construal level, progress versus commitment, identification, value reflection, and ambiguity. Our review reveals that individuals are more likely to exhibit consistency when they focus abstractly on the connection between their initial behavior and their values, whereas they are more likely to exhibit licensing when they think concretely about what they have accomplished with their initial behavior-as long as the second behavior does not blatantly threaten a cherished identity. Moreover, many studies lacked baseline conditions ("donut" designs), leaving it ambiguous whether licensing was observed. And although many proposed moderators yielded significant interactions, evidence for both significant consistency and balancing simple effects in the same study was nearly nonexistent.
For full article please see http://arjournals.annualreviews.org/eprint/kM7jcr6xQb4S7zEHUEE6/full/10.1146/annurev-psych-010213-115120
This study highlights competitive market conditions as an important structural determinant of escalation of commitment. Bridging escalation behavior literature and competitive dynamics research, we argue that reference to certain rivals may enable or disable decision makers to justify continuing investment in an underperforming initiative, thereby influencing a firm's tendency toward escalating commitment. We test our ideas using data on a set of leading companies in the information technology industry and their investment activities in China. Empirical analysis reveals strong evidence that a firm's escalating tendency is increased by larger competitors' high action volume and smaller competitors' positive performance. In contrast to prior research focus on decision makers' persistence irrespective of external cues, we also find that a firm's escalation behavior is decreased by larger rivals' negative performance.
The need for coordinated decision making bears on the pay gap between a firm's CEO and its other top executives. A behavioral view suggests that because more equal pay promotes collaboration, greater coordination needs encourage smaller pay gaps, and the combination of greater needs and smaller gaps enhances firm performance, An economic view implies the opposite because larger gaps create tournament-like incentives that address monitoring problems associated with joint decisions. We found that although economic theory was a better predictor of the size of CEO pay gaps, there was a balance between the economic and behavioral views as predictors of firm performance.