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Journal of Management
Accounting Research
2004, Volume 16
Contents
Forum on the Use of Stock and Stock Options in Employee Incentive Plans
Articles
Sink or Swim? Firms' Responses to Underwater Options
Sudhakar Balachandran
Mary Ellen Carter
Luann J. Lynch
Abstract:We examine changes in executive compensation that firms make in
response to underwater options. Using a sample of firms with underwater
options in 2000, we estimate that 81 percent of firms take action to respond
to them. We examine explanations for the firms' responses. Opponents argue
that it rewards poor performance and transfers wealth unjustifiably from
shareholders to executives. We find some support for this argument in that
firms with weaker governance structures are more likely to reprice
underwater options. Alternatively, firms that respond claim they do so to
restore incentives, retain executives, and insulate executives from
market-wide or industry-wide factors beyond their control. Our results find
evidence in support of these arguments in that restoring incentives and
retaining executives seem to be the primary drivers of firms' responses.
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Pay-Performance Sensitivity in a Heterogeneous Managerial Labor Market
Hui Chen
Fei Leng
Abstract:The persistently low pay-performance sensitivity between executive
compensation and firm performance has puzzled both practitioners and
academics. We propose a hybrid model that incorporates both moral hazard and
adverse selection problems to explain this puzzle. We argue that the
managerial labor market is heterogeneous in nature, not homogeneous as
assumed by the pure moral hazard model and empirical work based on this
model. We demonstrate that the optimal pay-performance sensitivity derived
from the hybrid model is lower than that derived from the pure moral hazard
model. Furthermore, we also show that pay-performance sensitivity is a
function of the mix of types in the market. The more capable managers there
are in the market, the more likely the market's average pay-performance
sensitivity is high. We then conduct an empirical test and find evidence
that is consistent with the prediction of our model.
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Compensation Committees and CEO Compensation Incentives in U.S.
Entrepreneurial Firms
Martin J. Conyon
Lerong He
Abstract:This study uses a sample of IPO firms to investigate the relation
between the compensation committee, CEO compensation, and CEO incentives. We
investigate two theoretical models: the three-tier optimal contracting model
and the managerial power model. We find support for the three-tier agency
model. The presence of significant shareholders on the compensation
committee (i.e., those with share stakes in excess of 5 percent) is
associated with lower CEO pay and higher CEO equity incentives. Firms with
higher paid compensation committee members are associated with greater CEO
compensation and lower incentives. The managerial power model receives
little support. We find no evidence that insiders or CEOs of other firms
serving on the compensation committee raise the level of CEO pay or lower
CEO incentives.
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U.K. Executive Compensation Practices: New Economy versus Old Economy
Konstantinos Stathopoulos
Susanne Espenlaub
Martin Walker
Abstract:This paper examines the executive compensation practices of listed
U.K. retailing companies. We compare "New Economy" retailers
(e-commerce/dot-coms) to more traditional retailers operating in the "Old
Economy." We also discriminate between recently floated retailers and their
more seasoned counterparts. Using a sample of remuneration contracts for 549
directors in 72 listed U.K. companies in the New and Old Economies, we
investigate the structure and level of executive (and nonexecutive)
compensation defined as the sum of salary, annual bonus, and the values of
executive stock options and long-term incentive plans (LTIPs). We
investigate the extent to which the contract features are determined by firm
characteristics, economic sector, and governance/ownership factors. In
contrast to the U.S., where almost all executive stock options are issued at
the money, there is a greater variety of practice in the U.K. with some
options being granted substantially in the money. We therefore pay special
attention to this U.K. institutional feature by producing a model designed
to explain the cross-sectional variation in the moneyness of stock options
at the date of issue. We also examine the determinants of a number of other
contract features. These are: the time to maturity of the executive stock
options, the leverage of the compensation package, the ratio of long-term
pay relative to short-term pay, and pay performance sensitivity. We find
that differences in compensation arrangements can be explained to a
significant extent by differences in firm size, growth/growth opportunities,
firm financial policy, ownership characteristics, and governance
arrangements. We also find some systematic differences between the
compensation arrangements of CEOs and other executives.
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Aggregation and Measurement Errors in Performance Evaluation
Anil Arya
John C. Fellingham
Douglas A. Schroeder
Abstract:In this paper, we present a sequential production setting wherein
employing aggregate measures for performance evaluation prove superior to
those constructed specifically to measure individual activity. In our
setting, unverifiable inputs translate into verifiable measures via two
types of shocks: the first is production errors that cause outputs to
deviate from inputs, and the second is measurement errors that result in
outputs themselves being stated imprecisely. Agents are evaluated using
either individual or aggregate measures, where the former measures the
incremental output added by each link and the latter measures the cumulative
output produced at the end of each stage. Aggregate measures can be
preferred to individual measures because they increase the sample size
available to infer upstream agents' unobservable acts and because they serve
as an avenue for measurement errors to cancel.
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Managing Value Creation within the Firm: An Examination of Multiple
Performance Measures
Lisa Bryant
Denise A. Jones
Sally K. Widener
Abstract: There has been an emphasis in recent years on understanding how
value is created within the firm. To understand what drives value, managers
must have in place performance measurement systems designed to capture
information on all aspects of the business, not just the financial results.
Many firms are implementing a Balanced Scorecard (BSC) performance
measurement system that tracks measures across four hierarchical
perspectives: learning and growth, internal business processes, customer,
and financial perspectives. Although BSCs should ideally be tailored to each
firm's unique strategy, evidence shows that managers tend to rely on generic
measures, particularly as measures of the outcome of each perspective. We
use cross-sectional data on seven archival measures from 125 firms over a
five-year period to proxy for typical outcome measures of the four BSC
perspectives. We find that a model that allows each outcome measure to be
associated with outcome measures in all higher-level BSC perspectives
captures the value-creation process better than a relatively simple model
that allows each measure to be a driver of only the next perspective in the
BSC hierarchy. We also find differences in the relations among performance
measures when firms implement a performance measurement system that contains
both financial and nonfinancial measures versus one that relies solely on
financial measures.
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The Value of Activity-Based Costing in Competitive Pricing Decisions
Eddy Cardinaels
Filip Roodhooft
Luk Warlop
Abstract: This paper reports experimental evidence on the merits of
activity-based costing (ABC) for price-setting in competitive markets that
differ in their ability to provide informative feedback. Earlier research
has shown that informative market feedback dominates the effects of
cost-system design. In a multimarket context involving cost allocations, the
present results suggest that cost-system refinement can play a significant
role in price-setting, even in the presence of informative market feedback.
Specifically, ABC provides benefits over volume-based costing in market
segments in which biased cost allocations produce accounting losses that
hinder learning from superior competitors. Compared to these informative
settings, additional evidence also shows that performance is negatively
affected by less informative market feedback. Yet in less informative
settings, ABC still outperforms traditional costing, presumably because it
helps to filter irrelevant competitor feedback from the decision process.
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Lessons Lost in Linearity: A Critical Assessment of the General Usefulness
of LEN Models in Compensation Research
Thomas Hemmer
Abstract: As the Linear-Exponential-Normal (LEN) Principal-Agent model has
gained in popularity, it has also increasingly been applied to problems
inherently inconsistent with the assumptions underpinning this fragile
framework. Concerns regarding LEN analysis in such cases are generally
countered by appealing to the results' intuitive nature. When consistent
with economic intuition, it is argued, the constraints the LEN framework
imposes on such problems are likely non-consequential. This paper
demonstrates in two simple cases that even seemingly intuitive results of
non-optimal LEN analysis can be fundamentally different from the results
that obtain from analysis of the unrestricted programs. Accordingly the
paper makes a case for limiting LEN-type analysis to settings that are
actually compatible with this framework.
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Does Managerial Accounting Research Contribute to Related Disciplines? An
Examination Using Citation Analysis
Yaw M. Mensah
Nen-Chen Richard Hwang
Donghui Wu
Abstract:This paper examines two issues. The first issue is the degree of
relative isolation of managerial accounting research (MAR) from related
disciplines. Using citations collected from the Web of Science, the study
shows that MAR published during 1986-2000 in the four leading accounting
journals is cited in journals in fields as diverse as economics, operations
research, psychology, sociology, organizational behavior, and strategic
management. Our findings support Kinney's (2001) observation that accounting
researchers have a competitive advantage in areas relating to alternative
business measurement structures.
The second issue the paper addresses is whether economics-based MAR papers
make a greater contribution than papers based on other disciplines, as
perceived from their respective citation rates. Our citation analysis finds
no evidence that economics-based papers are cited by non-accounting
researchers at a higher rate than MAR based on other disciplines. Extending
the comparison to accounting journals covered in the Web of Science did not
change this conclusion. We interpret this as a refutation of the contention
by Zimmerman (2001) that economics-based MAR papers are more likely to make
significant contributions to knowledge.
We also report some preliminary evidence that the relevance of MAR to
researchers publishing in non-accounting journals is waning. Although this
finding is tentative, it may be an early warning signal that should be
monitored in future research.
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Determinants of Customer Loyalty and Financial Performance
E. Smith
William F. Wright
Abstract: Recent research in accounting advocates nonfinancial measures of
company performance, such as customer satisfaction and loyalty, as useful
indicators of aspects of firm performance. But what are the drivers of
customer satisfaction and loyalty? We provide an integrated causal model of
company performance in the personal computer (PC) industry that
simultaneously tests links between product value attributes resulting from
business process performance, customer loyalty, and financial outcomes. Our
results extend prior accounting research (e.g., Banker et al. 2000; Ittner
and Larcker 1998) in two directions: (1) by explaining the determinants of
customer loyalty, and (2) by clarifying the relation between customer
loyalty and measures of financial performance. We report that product value
attributes directly and differentially impact levels of customer loyalty as
well as prevailing average selling prices. Furthermore, measures of customer
loyalty explain levels of relative revenue growth and profitability, and
relatively high customer loyalty engenders a competitive advantage in the PC
industry.
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Management Accounting: Some Comments
Charles T. Horngren
When I received the AAA Lifetime Contribution to Management Accounting
Award, I was asked to talk for a few minutes. This paper contains those
remarks plus some additions. Former articles have reflected on the changes
in management accounting throughout my long university teaching career
(Williams 1986; Horngren 1989, 1995). Moreover, some personal descriptions
of my experiences are available (Horngren 1993). Therefore, this paper will
not repeat those expositions of history. Instead, I will concentrate on a
few core ideas.
As always, all of us are heavily influenced by our readings and our
discussions with co-workers. This paper is a personal statement, but I claim
no originality. Many writers, colleagues, students, and managers have
affected my thoughts.t restoring incentives and retaining executives seem to
be the primary drivers of firms' responses.
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