David F. Larcker

Evaluating Structural Equation Models with Unobservable Variables and Measurement Error

The statistical tests used in the analysis of structural equation models with unobservable variables and measurement error are examined. A drawback of the commonly applied chi square test, in addit...

Corporate governance, chief executive officer compensation, and firm performance

Abstract We find that measures of board and ownership structure explain a significant amount of cross-sectional variation in CEO compensation, after controlling for standard economic determinants of pay. Moreover, the signs of the coefficients on the board and ownership structure variables suggest that CEOs earn greater compensation when governance structures are less effective. We also find that the predicted component of compensation arising from these characteristics of board and ownership structure has a statistically significant negative relation with subsequent firm operating and stock return performance. Overall, our results suggest that firms with weaker governance structures have greater agency problems; that CEOs at firms with greater agency problems receive greater compensation; and that firms with greater agency problems perform worse.

Assessing empirical research in managerial accounting: a value-based management perspective

This paper applies a value-based management framework to critically review empirical research in managerial accounting. This framework enables us to place the exceptionally diverse set of managerial accounting studies from the past several decades into an integrated structure. Our synthesis highlights the many consistent results in prior research, identifies remaining gaps and inconsistencies, discusses common methodological and econometric problems, and suggests fruitful avenues for future managerial accounting research.

Annual bonus schemes and the manipulation of earnings

Abstract Using confidential data of executive-specific short-term bonus plans, we investigate the extent to which executives manipulate earnings to maximize the present value of bonus plan payments. As such, this paper extends the work of Healy (1985). Like Healy, we find evidence consistent with the hypothesis that managers manipulate earnings downwards when their bonuses are at their maximum. Unlike Healy, we find no evidence that managers manipulate earnings downwards when earnings are below the minimum necessary to receive any bonus. We demonstrate that Healys results at the lower bound are likely to be induced by his methodology.

Performance Implications of Strategic Performance Measurement in Financial Services Firms

This study examines the relation between measurement system satisfaction, economic performance, and two general approaches to strategic performance measurement: greater measurement diversity and improved alignment with firm strategy and value drivers. We find consistent evidence that firms making more extensive use of a broad set of financial and (particularly) non-financial measures than firms with similar strategies or value drivers have higher measurement system satisfaction and stock market returns. However, we find little support for the alignment hypothesis that more or less extensive measurement than predicted by the firms strategy or value drivers adversely affect performance. Instead, our results indicate that greater measurement emphasis and diversity than predicted by our benchmark model is associated with higher satisfaction and stock market performance. Our results also suggest that greater measurement diversity relative to firms with similar value drivers has a stronger relationship with stock market performance than greater measurement on an absolute scale. Finally, the balanced scorecard process, economic value measurement, and causal business modeling are associated with higher measurement system satisfaction, but exhibit almost no association with economic performance.

The association between performance plan adoption and corporate capital investment

Abstract This paper examines the association between one specific change in executive compensation contracts (adoption of performance plans), changes in corporate capital investment, and security market performance. The empirical results indicate that (when compared to similar non-adopting firms) firms adopting performance plans exhibit a significant growth in capital expenditures and a favorable security market reaction to the announcement of the performance plan adoption. These results provide evidence that changes in executive compensation contracts are associated with changes in managerial decisions.

Quality strategy, strategic control systems, and organizational performance

Despite calls for greater management accounting involvement in the implementation and monitoring of strategic plans, prior studies suggest that few American or European firms employ formal strategic control systems. Using survey data from the automotive and computer industries in Canada, Germany, Japan, and the United States, we examine whether organizations following a quality-oriented strategy have adopted the strategic control practices discussed in the quality management literature. Our results indicate that organizations placing greater emphasis on quality in their strategic plans do tend to make greater use of quality-related strategic control practices. However, we find no evidence to support the claim that Japanese organizations link their control systems more closely to competitive strategies than organizations in the other countries. Instead, Japanese manufacturers appear to make greater use of many of the strategic control practices regardless of their organizations strategic emphasis The performance consequences of the strategic control practices vary somewhat by industry, suggesting that strategic control systems should be adapted to the organizations competitive environment. Finally, several strategic control practices are negatively associated with performance, consistent with claims that formal strategic control systems can actually hinder performance in some circumstances by focusing attention on formal and rigid action plans, targets, and information gathering when flexible and creative strategic responses may be more appropriate.

Executive Stock Option Plans and Corporate Dividend Policy

This paper examines the association between the initial adoption of stock options for senior-level executives and subsequent changes in corporate dividend policy. The primary research hypothesis is that the addition of a stock option to a managers compensation package provides an incentive for the executive to reduce corporate dividends. This hypothesis follows from the observation that executive stock options are generally not “dividend protected.” The results suggest that dividends are reduced relative to expected dividends. We interpret these results as suggesting that the personal incentives of executives can affect certain aspects of the observed corporate dividend policy.

Total quality management and the choice of information and reward systems

This paper examines the association between the use of advanced manufacturing practices and the choice of information and reward systems, and explores the impact of these choices on organizational performance. Although advanced manufacturing practices such as total quality management (TQMI) have been widely adopted over the past decade, surveys indicate that most of these initiatives have not yielded significant economic benefits (e.g., Mathews and Katel [1992] and The Economist [1992]). Many accounting researchers charge that the poor performance of many new manufacturing initiatives is due in part to continued reliance on traditional management accounting systems that do not provide appropriate problem-solving data, performance measures, and reward systems.1 We conduct an exploratory analysis of these claims using a

GOLDEN PARACHUTES, EXECUTIVE DECISION-MAKING, AND SHAREHOLDER WEALTH*

Abstract This study examines changes in executive decision-making and shareholder wealth which are associated with the adoption of special executive termination agreements, typically referred to as ‘Golden Parachutes’. Two hypotheses associated with Golden Parachutes (contracts which provide remuneration if there is a change in control of the corporation) are developed for empirical analysis. The results suggest that the adoption of Golden Parachutes is associated with a positive security market reaction. Moreover, the cross-sectional analysis of the security market reaction is consistent with the hypothesis that Golden Parachutes have a favorable effect on the reaction of executives to takeover bids.