Frank Moers

Testing contingency hypotheses in budgetary research: An evaluation of the use of moderated regression analysis

In the contingency literature on the behavioral and organizational effects of budgeting, use of the Moderated Regression Analysis (MRA) technique is prevalent. This technique is used to test contingency hypotheses that predict interaction effects between budgetary and contextual variables. This paper critically evaluates the application of this technique in budgetary research over the last two decades. The results of the analysis indicate that the use and interpretation of MRA often do not conform to proper methodology and theory. The paper further demonstrates that these problems seriously affect the interpretability and conclusions of individual budgetary research papers, and may also affect the budgetary research paradigm as a whole.

The issue of endogeneity within theory-based, quantitative management accounting research

Abstract A current issue of potential concern in theory-based management accounting research is the extent to which endogeneity limits the validity of empirical testing of models. This paper aims to stimulate debate as to the meaning of endogeneity as it applies to (management) accounting research. The paper explains what endogeneity is, its causes and consequences, and potential ways of managing the problem. Specifically, the paper argues that an econometric definition of endogeneity clarifies its meaning in empirical research. A series of basic issues that concern endogeneity and theory construction are presented. These include omitted variables, simultaneity, equilibrium conditions and issues concerning choice variables. Finally, possible approaches for dealing with endogeneity are presented.

Testing contingency hypotheses in budgetary research using moderated regression analysis: a second look

Abstract This paper addresses the use of moderated regression analysis (MRA) in contemporary management accounting and control research. It follows up on a discussion started by us [Hartmann & Moers, Accounting, Organizations and Society 24 (1999) 291–315] in this journal and provides a reaction to arguments put forward by Dunk (this issue). In doing so, this paper addresses the relationship between substantive theory and statistical test, emphasizes the need to distinguish between confirmatory and exploratory uses of MRA and argues that the importance of moderated hypotheses and tests may have been overstated in the management accounting literature under review.

Endogeneity: A Reply to Two Different Perspectives

In this paper, we provide a short reply to Larcker and Rusticus (this issue) and van Lent (this issue), both of whom comment on the Chenhall and Moers (this issue) paper (hereafter ‘CM’) on endogeneity issues in (management) accounting research published in this issue of European Accounting Review. The primary aim of CM is to stimulate debate in the area of endogeneity. We therefore appreciate that the Editor (Kari Lukka) has invited the authors of both papers to comment on CM and that the authors have accepted this invitation. It is clear from reading the papers by Larcker and Rusticus (this issue) and van Lent (this issue) that each paper provides interesting and thought-provoking insights into the issue of endogeneity. Each paper has a different perspective on endogeneity and therefore, at least implicitly, offers different advice on how to move the literature forward. Our goal is not to evaluate the relevance and validity of each individual argument made, as readers should do this for themselves. Rather our goal is to evaluate, from our perspective, the main messages that stem from these papers as to how to move forward. To reiterate, the main message of CM is that endogeneity is an issue we cannot ignore and that the crucial starting point in addressing this issue is theory development. We argue that without articulating the structural model of interest, which lies at the heart of theory-based research, it is difficult to make much progress in understanding the research issues being studied. We elaborate on the importance of theory throughout this reply. European Accounting Review Vol. 16, No. 1, 217–221, 2007

Managers' Choices of Performance Measures in Promotion Decisions: An Analysis of Alternative Job Assignments

In this study, we investigate the choice of performance measures in promotion decisions. In particular, we examine the extent to which managers incorporate different performance measures for different types of job assignment. Based on a simple theoretical framework, we predict that, in making promotion decisions, the weight on current job performance decreases with increases in the change in tasks upon promotion, while the weight on subjective assessments of ability increases. This result basically follows from the premise that, with increased changes in tasks between hierarchical levels, the ability to master the current job says little about the ability needed in the next job, which makes current job performance less informative and increases the emphasis on subjective assessments. Using panel data of a retail bank, we find that individual managers behave according to our predictions. By examining the choice of performance measures in promotion decisions, we are able to provide unique insights into the incentive versus sorting roles of promotions, which has important implications for performance measurement and incentive system design.

Doing Archival Research in Management Accounting

Abstract In this chapter, I discuss archival research in management accounting, where “archival” is narrowly defined and “management accounting” broadly. Given these definitions, I address the literatures excessive focus on one specific research area, i.e., executive compensation, and its use of publicly available data to answer the dominant research question. I argue that the easy access to databases has led to an uncritical use of the data, which begs the question of what we have learned. I conclude that, relative to the size of this field, we know very little about the design of incentive contracts for CEOs and propose two broad directions for future research.

An Empirical Analysis of the Role of Risk Aversion in Executive Compensation Contracts

This paper empirically tests the principal-agent model prediction that the use of performance measures for incentive purposes is affected by the agent’s risk aversion. We find that the use of both accounting and market performance measures in executive compensation contracts decreases as the level of risk aversions increases. We further find that agent-specific characteristics, i.e., risk aversion, become more important in designing executive compensation contracts when performance measures are less useful due to measure-specific characteristics.

The Role of Tacit Knowledge in Auditor Expertise and Human Capital Development

Two critical aspects of Tan and Libby [1997]’s model of auditor expertise development are that audit firms do not value tacit knowledge in inexperienced auditors but do value it in experienced auditors. We update the former and extend the latter. Our paper predicts and finds that audit firms now do value tacit knowledge in inexperienced auditors, especially when their supervisors have higher tacit knowledge. Our proxies of value include higher promotability assessments, annual evaluations, and cash bonuses. Our paper also extends Tan and Libby [1997] by positing that enhanced development of expertise and audit firm human capital are two reasons audit firms value tacit knowledge in experienced auditors. As predicted, higher tacit knowledge in experienced auditors is positively associated with higher tacit knowledge acquisition by their inexperienced subordinates and with stronger firm commitment of inexperienced subordinates having higher tacit knowledge.

Bonus Contracts, Private Information and CEO Turnover

In this paper, we address the question whether performance measures that are specified in annual bonus contracts represent overall performance dimensions used by boards of directors in making governance decisions. Recent studies claim that managerial incentives are predominantly provided by equity holdings rather than short-term cash compensation. Given the dominance of equity compensation and the fact that firms invest resources in the design and use of bonus contracts, it is unclear why the vast majority of firms continue to use annual bonus contracts if these would create only minor, or no incentive benefits. We argue that boards of directors use bonus contracts as a channel to ex-ante communicate how performance will be evaluated annually and thus signal the measures relevant for CEO termination decisions, which provides significant incentives. Further, the resulting cash compensation communicates the boards actual performance evaluation of the CEO, which can disclose private information to the capital market. Our empirical results are consistent with these arguments and show that the incentive weight on privately observed performance measures in bonus contracts is systematically related to the importance of these measures for CEO turnover. We further show that the stock market reaction to a management change depends on bonus contract design. We specifically find a positive reaction when boards of directors have signaled to solely use public information in CEO performance evaluation (good news about the board) and a negative reaction when they (also) use private information (bad news about the CEO). Overall, we show that the care taken in designing annual bonus contracts can be explained by its link with governance decisions and indicate that performance measurement issues are an important part of the corporate governance process.

The Influence of Target Ratcheting on Employees’ Investment Behavior

In this study we examine how target ratcheting affects employees’ tradeoff between short-term output and long-term investments. We hypothesize that while using past performance information in setting new targets (i.e. target ratcheting) decreases individuals’ short-term output, it increases investments in future productivity improvements by mitigating the negative consequences of the horizon problem. We test our prediction in a multi-period experiment, where we manipulate in a nested between subjects design the target setting procedure and within subjects the individuals’ time horizon. The results support our hypotheses that as individuals’ time horizon decreases the exogenously determined target groups lower their investment and put more attention to the short-term output task, while participants in the target ratcheting condition keep their initial strategy and invest relatively more in future productivity improvements. Therefore, this study provides a plausible explanation for the widespread use of an alleged dysfunctional practice, i.e., target ratcheting.