Using negotiated budgets for planning and performance evaluation: An experimental study : an experimental study

Budgets are often simultaneously used for the conflicting purposes of planning and performance evaluation. While economic theory suggests that firms should use separate budgets for conflicting purposes this contrasts with existing evidence that firms rarely do so. We address two open questions related to these observations in an experiment. Specifically, we investigate how a planning task that is in conflict with the performance evaluation task affects behavior in budget negotiations and their outcomes. Additionally, we analyze whether a single budget can be effectively used for both purposes compared to two separate budgets. We develop theory to predict that adding a planning task that is in conflict with the superior’s performance evaluation task increases the subordinate’s cooperation in and after the negotiation of a performance evaluation budget. Moreover, we predict that subordinate cooperation increases even more when the superior is restricted to use a single budget for both purposes. Our results broadly support our hypotheses. Specifically, we find that when budgets are used for both planning and performance evaluation, this increases the subordinate’s budget proposals during the negotiation and his performance after the negotiation. These effects tend to be even larger when the superior is restricted to a single budget rather than separate budgets for planning and performance evaluation, particularly with respect to subordinate performance. In our experimental setting, the benefits of increased subordinate cooperation even more than offset the loss in flexibility from the superior’s restriction to a single budget. The results of this study add to the understanding of the interdependencies of conflicting budgeting purposes and contribute to explain why firms often use a single budget for multiple purposes.

Long-run performance of initial public offerings: The evidence for Switzerland

We estimate the underpricing and long-run performance of Swiss initial public offerings (IPOs) from 1983 to 2000. The average market adjusted initial return is 34.97%. To examine the long-run performance of Swiss IPOs, we compute buy-and-hold abnormal returns, skewness-adjusted wealth ratios, and cumulative abnormal returns using 120 months of secondary market returns. In contrast to previous findings for the U.S. and Germany, we do not find strong evidence for a distinct IPO effect. We attribute long-run underperformance to the fact that IPO firms tend to be small firms. It virtually vanishes when we use a small capitalization index as a benchmark. In spite of distinct economic implications and statistical properties, our basic results are similar for all performance measures applied.

Target difficulty, intra-year target revisions and firm performance: evidence from business units' targets

Target difficulty is often argued to increase performance. While this association is well established in experimental research, empirical evidence in field research is rather mixed. We attempt to explain this inconsistency by analyzing the importance of intra-year target revisions, which are especially prevalent in real-world field settings. Using survey and archival data from 97 firms, we find that firms with more challenging business unit targets revise targets more often, in line with asymmetric, downward target revisions. Results further show that the degree to which targets are revised during a period results in negative effects on firm performance, as the anticipation of revision negatively affects the business unit management’s performance incentives. Additionally, we find that using targets predominantly for either decision-making or control influences the overall performance effects of target revisions. Our findings may partially explain the mixed field study evidence regarding the effects of target difficulty.

Identity, incentives and the value of information

We examine the impact of identity preferences on the interrelation between incentives and performance measurement. In our model, a manager identifies with an organization and loses utility to the extent that his actions conflict with effort-standards issued by the principal. Contrary to prior arguments in the literature, we find conditions under which a manager who identifies strongly with the organization receives stronger incentives and faces more performance evaluation reports than a manager who does not identify with the organization. Our theory predicts that managers who experience events that boost their identification with the firm can decrease their effort in short-term value creation. We also find that firms are more likely to employ less precise but more congruent performance measures, such as stock prices, when contracting with managers who identify little with the organization. In contrast, they use more precise but less congruent measures, such as accounting earnings, when contracting with managers who identify strongly with the firm.

Balance theory in eWOM: Even if you red-flag this product, I like it, as I dislike you

In eWOM the relationship between the consumer and the reviewer is weak. Still, the present study argues that social information, for example the reviewer`s user picture, influences the product evaluation. By applying balance theory we predict that the evaluation of the recommended product is a function of the induced attitude towards the reviewer and the valence of the review. By utilizing either positive or negative user pictures and either positive or negative reviews, we confirmed the hypothesized interaction. Consumers rated a negatively reviewed product more favorable when the reviewer used a negative user picture, compared to a positive user picture.

Assimilation and contrast in web product reviews: devaluing the recommendation of a proficient but dissimilar reviewer

When viewing web-consumer reviews consumers encounter the reviewers in an anonymous environment. Although their interactions are only virtual they still exchange social information, e.g. often reviewers refer to their proficiency or consumption motives within the review texts. Do these social information harm the viewers’ perception of the recommended products? The present study addresses this question by applying the paradigm of social comparison (Mussweiler, 2003) to web-consumer reviews. In a laboratory experiment with a student sample (n = 120) we manipulated the perceived similarity between reviewer and viewer and the perceived proficiency of the reviewer. A measurement of achievement goals (Elliott & McGregor, 2001) and average number of hours of study prior to the experiment allowed to introduce the reviewer as high [low] in proficiency and similar [dissimilar] in achievement goals. As predicted, the viewer’s evaluation of the recommended products differed as a function of this social information. Contrasting with the reviewer led to devaluing the products recommended by a proficient but dissimilar reviewer. However, against our prediction social comparison with the reviewer did not affect the viewer`s self-evaluation. Whether social information in web-product reviews affects the viewer`s self-evaluation and induces both social comparison processes remains an open question. Future studies aim to address this by manipulating the informational focus of the viewer, rather than the perceived similarity between viewer and reviewer. So far, the present study extends the application of social comparison to consumption environments and contributes to the understanding of the virtual social identity.

A Conceptual Model to Combine Creativity Techniques with Fuzzy Cognitive Maps for Enhanced Knowledge Management

This chapter introduces a conceptual model to combine creativity techniques with fuzzy cognitive maps (FCMs) and aims to support knowledge management methods by improving expert knowledge acquisition and aggregation. The aim of the conceptual model is to represent acquired knowledge in a manner that is as computer-understandable as possible with the intention of developing automated reasoning in the future as part of intelligent information systems. The formal represented knowledge thus may provide businesses with intelligent information integration. To this end, we introduce and evaluate various creativity techniques with a list of attributes to define the most suitable to combine with FCMs. This proposed combination enables enhanced knowledge management through the acquisition and representation of expert knowledge with FCMs. Our evaluation indicates that the creativity technique known as mind mapping is the most suitable technique in our set. Finally, a scenario from stakeholder management demonstrates the combination of mind mapping with FCMs as an integrated system.

Essays on behavioral aspects of the design and disclosure of compensation contracts

This thesis consists of four essays on the design and disclosure of compensation contracts. Essays 1, 2 and 3 focus on behavioral aspects of mandatory compensation disclosure rules and of contract negotiations in agency relationships. The three experimental studies develop psychology- based theory and present results that deviate from standard economic predictions. Furthermore, the results of Essay 1 and 2 also have implications for firms’ discretion in how to communicate their top management’s incentives to the capital market. Essay 4 analyzes the role of fairness perceptions for the evaluation of executive compensation. For this purpose, two surveys targeting representative eligible voters as well as investment professionals were conducted. Essay 1 investigates the role of the detailed ‘Compensation Discussion and Analysis’, which is part of the Security and Exchange Commission’s 2006 regulation, on investors’ evaluations of executive performance. Compensation disclosure complying with this regulation clarifies the relationship between realized reported compensation and the underlying performance measures and their target achievement levels. The experimental findings suggest that the salient presentation of executives’ incentives inherent in the ‘Compensation Discussion and Analysis’ makes investors’ performance evaluations less outcome dependent. Therefore, investors’ judgment and investment decisions might be less affected by noisy environmental factors that drive financial performance. The results also suggest that fairness perceptions of compensation contracts are essential for investors’ performance evaluations in that more transparent disclosure increases the perceived fairness of compensation and the performance evaluation of managers who are not responsible for a bad financial performance. These results have important practical implications as firms might choose to communicate their top management’s incentive compensation more transparently in order to benefit from less volatile expectations about their future performance. Similar to the first experiment, the experiment described in Essay 2 addresses the question of more transparent compensation disclosure. However, other than the first experiment, the second experiment does not analyze the effect of a more salient presentation of contract information but the informational effect of contract information itself. For this purpose, the experiment tests two conditions in which the assessment of the compensation contracts’ incentive compatibility, which determines executive effort, is either possible or not. On the one hand, the results suggest that the quality of investors’ expectations about executive effort is improved, but on the other hand investors might over-adjust their prior expectations about executive effort if being confronted with an unexpected financial performance and under-adjust if the financial performance confirms their prior expectations. Therefore, in the experiment, more transparent compensation disclosure does not lead to more correct overall judgments of executive effort and to even lower processing quality of outcome information. These results add to the literature on disclosure which predominantly advocates more transparency. The findings of the experiment however, identify decreased information processing quality as a relevant disclosure cost category. Firms might therefore carefully evaluate the additional costs and benefits of more transparent compensation disclosure. Together with the results from the experiment in Essay 1, the two experiments on compensation disclosure imply that firms should rather focus on their discretion how to present their compensation disclosure to benefit from investors’ improved fairness perceptions and their spill-over on performance evaluation. Essay 3 studies the behavioral effects of contextual factors in recruitment processes that do not affect the employer’s or the applicant’s bargaining power from a standard economic perspective. In particular, the experiment studies two common characteristics of recruitment processes: Pre-contractual competition among job applicants and job applicants’ non-binding effort announcements as they might be made during job interviews. Despite the standard economic irrelevance of these factors, the experiment develops theory regarding the behavioral effects on employees’ subsequent effort provision and the employers’ contract design choices. The experimental findings largely support the predictions. More specifically, the results suggest that firms can benefit from increased effort and, therefore, may generate higher profits. Further, firms may seize a larger share of the employment relationship’s profit by highlighting the competitive aspects of the recruitment process and by requiring applicants to make announcements about their future effort. Finally, Essay 4 studies the role of fairness perceptions for the public evaluation of executive compensation. Although economic criteria for the design of incentive compensation generally do not make restrictive recommendations with regard to the amount of compensation, fairness perceptions might be relevant from the perspective of firms and standard setters. This is because behavioral theory has identified fairness as an important determinant of individuals’ judgment and decisions. However, although fairness concerns about executive compensation are often stated in the popular media and even in the literature, evidence on the meaning of fairness in the context of executive compensation is scarce and ambiguous. In order to inform practitioners and standard setters whether fairness concerns are exclusive to non-professionals or relevant for investment professionals as well, the two surveys presented in Essay 4 aim to find commonalities in the opinions of representative eligible voters and investments professionals. The results suggest that fairness is an important criterion for both groups. Especially, exposure to risk in the form of the variable compensation share is an important criterion shared by both groups. The higher the assumed variable share, the higher is the compensation amount to be perceived as fair. However, to a large extent, opinions on executive compensation depend on personality characteristics, and to some extent, investment professionals’ perceptions deviate systematically from those of non-professionals. The findings imply that firms might benefit from emphasizing the riskiness of their managers’ variable pay components and, therefore, the findings are also in line with those of Essay 1.