The Accounting Review, forthcoming

This study examines how company boards adjust performance targets in response to CEO overconfidence. Focusing on the annual bonus targets for the CEOs of S&P 1500 firms, the research finds that boards set higher performance targets for overconfident CEOs compared with those for non-overconfident CEOs. This trend holds even after thorough robustness checks. The findings further show that in firms with strong monitoring environments, performance targets for overconfident CEOs are increased even more. Collectively, the study suggests that a CEO’s confidence level is a key factor that boards consider when setting performance targets, offering new insights into how CEOs' personal traits influence their annual bonus performance targets.

Strategic Management Journal, 2024, 45(6): 1151-1179

This study investigates how large companies organise their businesses to handle pollution-heavy operations. It looks at whether these companies place such activities in their less visible subsidiaries to protect the main company from legal issues related to environmental laws. Understanding this is crucial because it reveals a potential loophole in environmental regulations. If companies can simply move their polluting activities to a different part of their business to avoid scrutiny, then current laws may not be as effective as intended. The research examined 7400 US-based business units owned by the 67 largest US-headquartered chemical manufacturers. It found evidence that these companies indeed conduct their most polluting work in their lower-tier subsidiaries, especially in states with stricter environmental laws. The study findings suggest that companies might be using their complex structures to sidestep environmental responsibilities, which could undermine efforts to protect the environment. It highlights the need for regulators to consider the entire corporate group when enforcing environmental laws, not just the parent company.

Journal of Management Information Systems, 2023, 40(4), 1139-1170

This study investigates the potential security risks that arise when firms adopt new information technologies (IT). It focuses on how these technologies might inadvertently increase the chances of unauthorised access to sensitive data. Despite widespread concern about the security risks of new technologies, there has been little concrete research on how these innovations may lead to data breaches. Our study provides empirical evidence to address this gap.

Using a sample of data breaches that occurred between 2013 and 2021, we find a positive association between a firm’s proclivity to adopt new technologies and an increased risk of data breaches. However, we also find that this risk is lessened if managers are IT experts or if firms have strong board connections with cybersecurity managers. Interestingly, we also note that the risk is heightened in complex technological environments, but not necessarily in ones that are dynamic or well-resourced.

The study findings highlight the importance of firms taking a cautious approach towards adopting new technologies and carefully considering the implications. The study emphasises the significance of firms learning from past data breaches and adapting to their specific technological context to mitigate the potential risks associated with new IT innovations.

Journal of Financial and Quantitative Analysis, 2024, 59(2): 474-520

We build a novel comprehensive data set of new product trademarks as an output measure of product development innovation. We show that risk-taking incentives in CEO compensation motivate this type of innovation and that this innovation improves firm performance. Using an exogenous shock to executive compensation, we find that reductions in stock option compensation cause reductions in new product development. We also find that firms undertaking new product development experience increases in future cash flow from operations and return on assets. These findings suggest the importance of product development innovation to firms and new trademarks as a novel innovation measure.

Management Science, 2024, 70(1): 54–77

International Financial Reporting Standard (IFRS) 9 is of practical relevance to banks because it requires intense monitoring of borrowers to record timely loan losses. Using data from 50 countries, we find that accounting-driven bank monitoring due to IFRS 9 adoption reduces firms’ reliance on bank debt relative to public debt. This finding is consistent with firms experiencing more costly bank monitoring after a shift in regulatory reporting that requires banks to monitor borrowers more intensely. In further analyses, we find that the negative effect of IFRS 9 adoption on bank debt reliance is more pronounced with more stringent regulatory supervision of banks, consistent with regulatory stringency exacerbating costly bank monitoring for firms. We also find that the negative effect is stronger when firms can more easily switch from bank debt to public debt financing, consistent with the relevance of switching costs in firms’ decisions to avoid costly bank monitoring.

The Accounting Review, 2024, 1-28

This study examines whether politicians exhibit hometown favoritism in assigning preferential corporate income tax rates. We find that firms with hometown connections to incumbent provincial leaders experience favorable tax treatment. This effect is more pronounced when provincial leaders have strong hometown preferences and weaker when these leaders have a strong motivation for promotion, suggesting that social incentives are the primary drivers of the effect of hometown favoritism by politicians on corporate tax benefits. Moreover, this effect is intensified when senior management of firms has personal connections with the provincial leader. The mechanism test reveals that the provincial governments tend to qualify connected firms for preferential tax policies under their jurisdictions. Overall, our results suggest that hometown favoritism by politicians promotes tax benefits for business entities.

Review of Accounting Studies, 2024, 29:809–851

We explore the informational properties of earnings that compensation contracting requires for performance measurement. While conditional conservatism could be desirable because it can help to alleviate agency conflicts, its downside relates to the trade-off between conservatism and other important properties, such as persistence. We infer boards’ performance measurement preferences from a novel dataset of earnings realizations used to calculate executive bonus payouts (which we label compensation earnings), which can be either GAAP or non-GAAP. On average, compensation earnings do not exhibit any conditional conservatism in the full sample. The lack of conservatism holds even in subsamples with strong corporate governance and subsamples with high ex ante agency costs, suggesting optimal contract design rather than opportunism. Finally, our analyses indicate that compensation earnings are more persistent and informative than GAAP earnings. Overall our results suggest that boards trade off conservatism for other properties in measuring performance for executive compensation.

Journal of Applied Psychology, 2023, 108(12), 2040–2052

Although people often value the challenge and mastery of performing an activity, their satisfaction may suffer when the tasks comprising the activity are perceived as difficult. Thus, it is important to understand the factors that influence subjective judgments of difficulty. In this research, we introduce an easily actionable and effective tactic to reduce perceptions of the overall difficulty of an activity: We find that concluding a sequence of difficult tasks with a few easy tasks can decrease perceived difficulty of the aggregate activity. While appending extra tasks to a constant sequence should increase the objective amount of effort necessary to complete all the tasks, we find that more tasks can paradoxically be perceived as less effortful. We coin this phenomenon the easy addendum effect and demonstrate that it is less likely to occur when an overall activity is conceptualized as consisting of a single category rather than two distinct categories—that is, a set of difficult tasks followed by a set of easy tasks. We further show downstream consequences of this effect—through lower perceived difficulty, the easy addendum effect can lead to greater satisfaction, persistence, and more tasks performed overall.