Dhananjay Nanda

Earnings Management and Investor Protection: An International Comparison

This paper examines systematic differences in earnings management across 31 countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong protection limits insiders’ ability to acquire private control benefits, which reduces their incentives to mask firm performance. Our findings are consistent with this prediction and suggest an endogenous link between corporate governance and the quality of reported earnings.

The impact of just-in-time manufacturing on firm performance in the US

Just-In-Time manufacturing has been subjected to numerous studies both empirical and methodological. This work attempts to measure the impact of JIT on accounting measures of performance. Most technologies and investments are justified on the basis of their impact on financial and accounting measures which are not easily quantified. Our empirical methodology, simultaneous equation estimation, allows us to isolate the partial effects of JIT on various accounting measures thus gauging the true impact of this method on firm performance. Our results show that after JIT adoption firms reduced the labor content in facilities, increased inventory turnover and enhanced earnings. There was no significant impact on prices charged by the firm. These results support the anecdotal evidence on JIT and the theoretical work done by various authors. Even though the firms studied experienced a downturn in their performance our empirical methodology could identify positive benefits resulting from JIT adoption.

Access, Common Agency, and Board Size

We study the impact of the size of a firms board of directors on managerial incentives. We present a model where a risk-averse agent (the top management team) performs multiple tasks for a firm that is controlled by multiple principals (the board of directors) who differ in the relative value they place on each task. We show that the agents incentives are lower than they would be had the board been smaller. Our empirical results are consistent with the models predictions. We find that the number of social objectives (community, diversity, environment, etc.) that a firm pursues is positively related to board size. Board size is negatively related to managerial incentives. We also find that firms incorporated in states with alternative constituency statutes (allowing boards to consider the interests of constituencies other than shareholders) pursue more objectives, have larger boards, and lower managerial pay-performance sensitivities. Our results are robust to the inclusion of various board and firm control variables and to a myriad of specifications.

Computer integrated manufacturing: Empirical implications for industrial information systems

Abstract:This paper describes the results of a recent field study of computer integrated manufacturing (CIM) adoption strategies in U.S. manufacturing firms. The purpose of the study was to identify the extent to which CIM technologies are in use in U.S. firms, the impact of a facility’s process characteristics on the CIM development process, and the adoption policy being followed implicitly or explicitly. The survey focused on manufacturing process characteristics, the CIM development process, the CIM architecture, and perceived value and benefits. Our results indicate that CIM implementations follow a definite temporal pattern with respect to the adoption of certain information technologies. We also find evidence of labor substitution through CIM, although the direct labor jobs that are lost are partially replaced by engineering and design tasks. While most CIM users find that their CIM projects successfully meet their initial operational goals, the technology seems to be poorly integrated in most sites...

Reply to: dynamic incentives and responsibility accounting: a comment

Abstract Christensen et al. (Dynamic incentives and responsibility accounting: a comment, J. Account. Econ. 35 (2003) 423) examine Indjejikian and Nanda (J. Account. Econ. 27 (1999) 177) and suggest that our characterization of the inefficiency arising from limited commitment as a “ratchet effect” phenomenon is misplaced. In this reply, we describe the ratchet effect as commonly understood in the literature, clarify the role of contractual commitments in our analysis, and then illustrate why both the substance and interpretation of our original results continue to be appropriate.

Business experience with computer integrated manufacturing. A survey of current strategy and practice

The paper describes the results of a recent field study of CIM adoption strategies in US manufacturing firms. The purpose of the study was to identify the extent to which CIM technologies are in use in US firms, the impact of a facilitys process characteristics on the CIM development process, and the adoption policy being followed implicitly or explicitly. The survey focused on the following aspects:(a) manufacturing process characteristics, (b) the CIM development process, (c) the CIM architecture, and (d) perceived value and benefits. Our results indicate that CIM implementations follow a definite temporal pattern with respect to the adoption of certain information technologies. In addition, the initiative for CIM programs is usually generated from the bottom-up. This gradual bottom-up approach appears to restrain, rather than enable, plant-wide integration for critical business processes such as order fulfilment or product development. While most CIM users find that their CIM projects successfully meet their initial operational goals, the technology seems to be poorly integrated still. More crucially, it appears that CIM is not being adopted as a strategic information system for competitive missions.<<ETX>>

Financial Reporting Differences Around the World: What Matters?

The international financial reporting literature identifies a multitude of country attributes that each appear to explain financial reporting differences around the world. We first show that a single underlying factor explains across-country variation in 6 reporting quality measures used in the international literature. We then examine 72 country attributes and show that they are highly correlated and that 4 underlying factors explain most of the variation in these attributes across countries. Furthermore, individual country attributes provide essentially no incremental explanatory power for international reporting diversity over these 4 factors, which collectively explain over 70% of the variation in reporting differences. Our findings highlight the very high causal density of country attributes and thus the difficulty in attributing international reporting diversity to specific institutions and policies. We conclude with a discussion of possible future directions for research on financial reporting around the world.

Dual Purpose Measures

We examine a firms choice of a measurement system designed to serve two distinct objectives; provide forward-looking information about future firm productivity and ex post information about past managerial performance. A firm can have two separate measurements, one for each purpose, or a single measure that simultaneously serves both objectives. In a two-period principal-agent model, we illustrate how implicit incentives can lead firms to prefer a single dual-purpose measure.

Selective and Aggregate Disclosure

We study the disclosure strategy of a firms manager who may privately observe two signals that are informative about the firms prospects. The two signals correspond to the firms two business segments and are observationally correlated, i.e. the observation of one affects the likelihood of observing the other. If the manager makes a separate disclosure of each signal, we show that, there exists a selective disclosure equilibrium where the manager is falsely modest; i.e. he suppresses favorable information even if it is his only information. We then demonstrate that this equilibrium may result in lower welfare than an aggregate disclosure regime, where the manager is restricted to disclosing the aggregate of the two signals, even though it garbles information.

Is Corporate Social Responsibility an Agency Problem? Evidence from CEO Turnovers

We empirically examine two competing claims: first, if a firm’s Corporate Social Responsibility (CSR) activity is driven by its CEO’s private rent extraction (i.e. an agency problem), firms with higher CSR ratings are poorly governed and their managers are less likely to be dismissed for poor financial performance. In contrast, if CSR reflects owners’ preferences, CEOs of firms with higher CSR ratings are more likely to be removed in light of poor financial performance. We find that CEO turnover-financial performance sensitivity increases in firm CSR scores during the last years of both the outgoing CEO as well as his predecessor. Further, firm CSR ratings do not change following CEO turnover suggesting that CSR ratings are a firm characteristic. Our findings are consistent with the view that CSR is driven by shareholder preferences.