Frederick W. Rankin

The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective

This study examines the behavioral impact of an information system, and how that impact varies with the information systems precision, in an internal reporting environment. In order to examine behavioral effects, we do not permit the owner to contract on the systems output. We propose that a managers reporting decisions are affected by his tradeoff of the benefits of appearing honest against the benefits of misrepresentation. An owners information system affects the managers tradeoff by improving the owners ability to make an inference regarding the managers level of honesty. Thus, to the extent that the manager perceives benefits to appearing honest, the presence of an information system can increase managerial honesty. As the information system becomes more precise, however, the manager must forego greater benefits of misrepresentation in order to achieve the same appearance of honesty. For managers under a precise system, this will shift the tradeoff decision toward the benefits of misrepresentation and away from the benefits of appearing honest. Notably, in our experiment the only benefit of appearing honest is an intrinsically-motivated desire for social approval. Our experimental results are consistent with the tradeoff notion. We find that, although the existence of an information system increases managerial honesty, honesty is lower under a precise than a coarse information system. We also compare profit earned by the owners in our experiment, which relies on a behavioral role of an information system, to the maximum profit theoretically possible given a contractual use of the information system. This comparison suggests that, unless the available information system is sufficiently precise, the owner will obtain greater profits by not contracting on its output, even if that output is fully contractible.

Flattening the Organization: The Effect of Organizational Reporting Structure on Budgeting Effectiveness

The invention concerns a washing composition for washing a surface to deposit thereon substantially water-insoluble particles. The aqueous washing composition of the invention comprises an anionic surfactant, the particulate substance to be deposited and a water-soluble cationic non-cellulosic polymer which enhances the deposition of the particulate substance onto the surface but which cationic polymer does not form in the composition a water-insoluble complex with the anionic surfactant, the cationic charge density of the polymer being from 0.0001 to 0.0017; the concentration of the cationic polymer in the washing composition being from 0.0001% to 0.01% by weight; and the concentration of the surfactant in the washing composition being from 0.01% to 5% by weight.

The Effects of Risk Preference and Loss Aversion on Individual Behavior Under Bonus, Penalty, and Combined Contract Frames

This study examines the effects of risk preference and loss aversion on individual responses to differently framed, yet economically equivalent, incentive contracts. We extend prior research by examining contracts with combinations of bonus, penalty, and clawback incentives. Contracts framed as a combination of bonus and penalty incentives, especially those framed as a clawback, are less attractive to participants than contracts with bonusor penalty-only incentives. Further, research suggests that individuals’ contract preferences are due primarily to loss aversion. We test this conjecture with a new measure of loss aversion. Results indicate that our measure of loss aversion is well calibrated to encompass variation in loss aversion. In addition, participants’ loss preferences explain a significant portion of the differences in observed behavior. Importantly, this relation is less significant for clawback contracts, indicating that other preferences may be driving individuals’ strong reactions to these contract frames.

Who’s the Boss? The Economic and Behavioral Implications of Various Characterizations of the Superior in Participative Budgeting Experiments

In most organizations, budgets are important mechanisms for planning and control and for motivating subordinate performance. Accordingly, budgeting is one of the most extensively studied topics in managerial accounting. We analyze previous research by first classifying studies according to their characterization of the superior which we label Homo Economicus, Homo Optimas and Homo Vivas. Homo Economicus is a rational economic agent who accepts all budgets because it is in her best interest to do so. Homo Optimas employs the optimal hurdle-rate contract. Finally, Homo Vivas is an experimental participant whose role depends on the decisions she is allowed to make as determined by the experimental design. We explore the economic and behavioral implications of each type of superior for the interpretation of extant research and we provide directions for future research in participative budgeting.

The Delegation of Decision Rights: An Experimental Investigation

Despite the benefits of delegating decision rights, it is claimed that firms under delegate decision-making authority. However, to date, this claim is untested. This paper explores the choice between information elicitation and delegation. We also examine the effect of this choice on the subordinates’ incentives to gather decision facilitating information. We find that, compared to agency theory predictions, superiors do not delegate as much as they should and subordinates respond by devoting less effort to the acquisition of valuable information. Compared to the case where the decision is delegated, subordinates exert less effort when their information is elicited for both behavioral and economic reasons. This behavior results in superiors earning less profit.

The Unintended Consequences of Headquarters’ Involvement in Decentralized Transfer Price Negotiations : Experimental Evidence

This study investigates how headquarters involvement affects the efficiency of decentralized transfer price negotiations. Prior research assumes that decentralized managers negotiate transfer prices autonomously. However, evidence suggests that headquarters can become involved in transfer price negotiations, particularly after negotiation failure. While the intention of headquarters involvement is to overcome inefficiencies arising from decentralized managers’ inability to agree on a transfer price, we suggest that such involvement is likely to have the unintended consequences of further reducing both agreement frequency and the efficiency of negotiated transfer pricing. Reduced agreement is likely to occur because decentralized managers are likely to feel less responsible for the negotiation outcome and may be overly optimistic about headquarters’ decision. Reduced efficiency is likely to result because overconfidence is likely to make headquarters underestimate its informational disadvantage compared to decentralized managers and, consequently, induces inefficient transfer decisions. For the same reasons, inefficiency is likely to be the larger, the more decision authority headquarters takes over after negotiation failure. In an experiment, we manipulate whether headquarters involvement is absent vs. present. Nested within headquarters involvement present are two conditions: one where, after negotiation failure, headquarters suggests a transfer price that either decentralized manager can reject (weak involvement) and one where it can impose a price at which they must trade (strong involvement). Consistent with our predictions, we find that headquarters involvement reduces the frequency of negotiation agreement and the efficiency of transfer pricing. Additionally, we find that efficiency is reduced more when headquarters involvement is strong rather than weak. We contribute to the literature on negotiated transfer pricing by providing evidence about headquarters’ biased perceptions of negotiation impasse and the unintended consequences of its involvement. Additionally, our study informs organizations about the benefits of committing to non-involvement in decentralized transfer price negotiations.