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Influence Activities and Favoritism in Subjective Performance Evaluation: Evidence from Chinese State-Owned Enterprises

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Abstract

This study addresses the two-way process in which a subordinate and a superior engage in influence activities (bottom-up) and favoritism (top-down) in subjective Performance Evaluation. The research context is the Chinese government's evaluation of Chinese state-owned enterprises (SOEs) by the State-Owned Assets Supervision and Administration Commission of China (SASAC). We analyze archival records of the government's evaluation scores, score adjustments, and evaluation ratings given to 63 SOEs between 2005 and 2007. These analyses are also interpreted based on insights gained from in-depth field interviews with SASAC officials and chief financial officers (CFOs) of SOEs. Results indicate that the political connection of SOE CFOs, the geographic proximity of SOE headquarters to the SASAC central office, and political rank of the firm affect the SASAC's evaluations. Data Availability: Data used in this study cannot be made public due to a confidentiality agreement.

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... There has been significant research interest in emerging and less-developed countries (Alawattage & Wickramasinghe, 2009;Alawattage, Hopper, & Wickramasinghe, 2007;Hopper, Tsamenyi, Uddin, & Wickramasinghe, 2009), particularly in terms of how intrinsically 'Anglo-American' practices of accounting and control interplay with local contexts underpinned by distinctive social, political and cultural factors (Alawattage, Wickramasinghe, & Uddin, 2017; van Helden & Uddin, 2016). In this respect, China has so far offered a fruitful context, mainly because of what appears to be an 'established' socialist regime, with distinctive and immutable cultural facets (Chow, Lindquist, & Wu, 2001;Douglas & Wier, 2005;Du, Tang, & Young, 2012;Tsui, 2001). ...
... A concurrent development has been the improving fortunes and dynamism of Chinese SOEs and of the underlying state-driven interests in pursuing economic reforms (Chow, 2011;Du et al., 2012). In particular, there has been more attention paid to the political (and geopolitical) dimensions of China's economic reforms and the role played by accounting and accountants (Xu, Cortese, & Zhang, 2013;Yee, 2012). ...
... The importance of the economic base in building this 'practical' ideology further suggests that economic organisations, such as SOEs, play a significant role in China's portrayal and enactment of its hegemony. In this way, our paper seeks to respond to calls by previous authors to examine more closely the role and dynamic nature of SOE management (and their accounting and control practices) in promoting China's ideology of ''economic development" (Chow, 2011;Du et al., 2012). ...
Article
This paper critically analyses the role of accounting in China’s new phase of politically driven economic reforms, which is the international expansion of Chinese enterprises. In particular, the paper examines how China’s multinational state-owned enterprise (SOE) and its managers conceive of, and use, accounting and control practices in response to the state’s international political and economic objectives. Drawing upon neo-Gramscian concepts of hegemony, this study contends that the Chinese Communist Party (CCP) has sought to create and maintain its hegemony by turning its political ideologies into initiatives of “economic development”, articulated through intensive ideological and political work exercised from the national to the organisational level. The study highlights the role of SOE managers in accommodating accounting and control practices in line with the state’s hegemonic and ideological demands. Crucially, it reveals the ability of managers to coordinate and balance the state’s political ends and the enterprise’s economic interests, where there is a selective use of accounting and control practices deployed for reasons beyond their economic functionality. This paper argues that it is necessary to include the superstructure and economic base of the Chinese state in a hegemonic analysis, and to investigate how the managerial cadre engages with ideology building at the organisational level. By focusing on the Chinese state’s new political dynamism regarding the expansion of multinational business operations, this paper provides new insights into the complexity of the motivations underlying the use of accounting and control practices in a globalised context.
... Table 1 provides an example of the assessment of a major SOE of a province. Du et al. (2012) explain in detail how the SASAC assesses the central SOEs. Specifically, the SASAC works with subordinate SOEs to determine the target operating results for the next year in the fourth quarter of each year. ...
... For example, subordinates may waste resources to maintain good relationships with their superiors to obtain good evaluation results (e.g., Milgrom, 1988). Du et al. (2012) find that the political relevance of SOE CFOs and the geographic proximity of SOEs and SASAC are positively correlated with the level of subjective evaluation. Thus, SASAC's evaluations of SOEs may be affected by non-performance factors. ...
Article
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State-owned enterprises (SOE) are essentially extensions of the government and are therefore responsible for multi-task objectives. The incentive system for SOE managers consists of both monetary compensation and promotion within the bureaucratic system. Political promotion is key to understanding the incentives of SOE managers. In the reform and opening up era, SOEs have been reformed and exposed to political and market forces. The design of incentive systems for SOE managers has thus become complicated and challenging. Our study provides important implications for this key issue of SOE reform.
... To survive and succeed, they must continuously search for optimal ways to manage simultaneously competing demands. Empirical evidence suggests that 'SOEs must balance multiple goals and make trade-offs between social responsibility and economic benefits, which leads to use of multi-measure performance evaluation' (Du, Tang, andYound, 2012: 1583). ...
... For example, Moer (2005) finds that managers give higher performance ratings when more subjectivity is used to evaluate and reward employees. Yet further research suggests that the use of subjective measures results in distorted ratings due to cognitive biases and the subordinate's influence, along with lower goal clarity because there is a lack of formally defined, precise targets (Voubem et al., 2016;Du et al., 2012). In order to capture the benefits of subjectivity in performance measurement, it is important to recognise their potential adverse effects on organisational efficiency. ...
Technical Report
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Subjectivity is often eyed with suspicion in a commercial world. This project investigated how subjectivity was applied in the strategic performance measurement system (SPMS) of a large Chinese state-owned enterprise (SOE) where both market and government forces coexist long term. Its innovative five-dimension SPMS integrates financial and non-financial with subjective and objective measures. The same dimensions were applied across its strategic business units (SBUs) to communicate firmwide that meeting multiple demands was an inherent aim of SOEs, and to be embraced by all the SbUs. However, the weightings for each dimension varied across the SBUs and over time, reflecting the dynamic strategic position of each unit. For firms with multiple, simultaneous and often competing demands, our case study shows how the use of subjectivity in measures and weightings can keep a multi-dimension SPMS stable yet flexible. The study also reveals innovative mechanisms used in participative target-setting. These show how using subjectivity in incentive formulas can transform difficult bargaining into greater cooperation between superiors and subordinates. These could be particularly important for multi-divisional firms with activities in many different areas. Using objective and subjective measures together, maintaining stability while embracing flexibility, and accepting ‘push’ alongside ‘pull’, our case study celebrates paradox management. It suggests that a finely calibrated SPMS that simultaneously integrates opposing forces in a system can be particularly beneficial for organisations operating in complex and dynamic environments. Considering the nature of Yin and Yang within a particular mechanism and integrating duality into systems, we bring Chinese wisdom into management control practice.
... Recent studies provide insights into some of these aspects. For example, Du et al. (2012) examine the evaluations of SOEs and find that the political connections of SOE, CFOs, geography of the SOE, and the political rank of the SOE influence their evaluations. In addition, studying the failed experiments as well as the successful ones could provide us with insights into the institutions that are necessary or sufficient for markets and enterprises. ...
... Hung et al. (2012) examine why SOEs with strong political connections are more likely to list overseas than non-politically connected SOEs and find that overseas listing itself appears to be a goal; as such, the bottom-line performance metrics are more poor for politically connected than non-politically connected SOEs. 5 Recent studies provide insights into these aspects. For example, Du et al. (2012) examine the evaluations of SOEs and find that the political connections of SOE, CFOs, geography of the SOE and the political rank of the SOE influence their evaluations. 4. How were the measures verified? ...
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How can China achieve phenomenal economic growth despite what is considered as “weak” institutions in market-based economies? Xu (2011) provides a framework to understand this puzzle. Specifically, he suggests that China’s institutional framework of Regionally Decentralized Authoritarian regime was likely responsible for the phenomenal economic growth despite what is considered “weak” institutions for market-based economies. While recent accounting research provides insights into the relationship between agency issues, and accounting and control systems in the China context, accounting researchers can use the institutional feature of RDAs to provide insights into the role of accounting and control systems in non-market-based settings.
... By considering one's positive affective reaction to a manager proposing a project, reviewers are favouring the proposing manager and, implicitly, discounting the economic fundamentals of the project. In general, the organizational behaviour and economics literatures hold that favouritism is costly for organizational decision making because it leads to added arbitrariness in decision making, including a misallocation of resources and a distortion of incentives (Arasli and Tumer, 2008;Bandiera et al., 2009;Du et al., 2012;Fu, 2015;Ozler and Buyukarslan, 2011;Prendergast and Topel, 1996;Roy and Roy, 2004;von Hippel, 2006). Given the relative costs and unacceptability of favouritism, we expect accountability will lessen the influence of positive affective reactions to a manager proposing a project on reviewers' capital project choices. ...
... A manager benefits from having a capital project selected by having control over more resources, which implicitly gives the manager more power and prestige and may provide more slack to the manager. In general, favouritism can be costly to organizations, and consequently, this behaviour is generally discouraged (Arsali and Arasli and Tumer, 2008;Du et al., 2012;Fu, 2015;Ozler and Buyukarslan, 2011). From the organization's perspective, favouritism leads to added arbitrariness in decision making, including a misallocation of resources and a distortion in incentives (Bandiera et al., 2009;Fu, 2015;Ozler and Buyukarslan, 2011;Prendergast and Topel, 1996). ...
Article
It is generally recognized that decisions about capital projects should be made by independent reviewers who select the economically strongest projects. However, prior research finds that reviewers’ choices can be biased by their affective reactions to a manager proposing a capital project. Potentially, this bias could be reduced by holding reviewers more accountable. We contend that holding reviewers accountable will lessen the effect of positive, but not negative, affective reactions on capital project choice. To provide evidence on our predictions, we conduct an experiment using highly experienced participants. Participants’ task is to select between two capital projects, each proposed by a different manager. Although one project is economically preferred relative to the other project, we manipulate whether there is a negative affective reaction to the manager proposing the preferred project or a positive affective reaction to the manager proposing the non-preferred project. We also manipulate the presence versus absence of reviewer accountability. As expected, participants were more likely to select the economically non-preferred project when proposed by a manager triggering a positive affective reaction, but this tendency was reduced by accountability. Also, as expected, participants were less likely to select the economically preferred project when proposed by a manager triggering a negative affective reaction, and accountability did not reduce this tendency. Implications of our findings for theory and practice are discussed.
... However, recent research raises doubt about the SASAC's ability to evaluate SOE managers objectively, accurately, and effectively. Du, Tang, and Young (2012) study the SASAC's performance evaluation of sixty-three SOEs during 2005-07. They find that SOE managers receive higher evaluation scores, ratings, and ex-post score adjustments when managers have political connections, the firm is geographically near the central SASAC office, the SOE fulfills state objectives, and/or the SOE has a high political rank. ...
... However, many people believe that companies have a responsibility to all their stakeholders, including society at large, not only 26 Chinese SOEs are classified by administrative rank. Du, Tang, and Young (2012) use two criteria to code the political rank of individual SOEs: whether an SOE is a "vice-ministerial level" firm and whether the Organization Department of the CPC Central Committee assigns its CEO. ...
Article
This article surveys corporate governance in China, as described in a growing literature published in top journals. Unlike the classical vertical agency problems in Western countries, the dominant agency problem in China is the horizontal agency conflict between controlling and minority shareholders arising from concentrated ownership structure; thus one cannot automatically apply what is known about the USA to China. As these features are also prevalent in many other countries, insights from this survey can also be applied to countries far beyond China. We start by describing controlling shareholder and agency problems in China, and then discuss how law and institutions are particularly important for China, where controlling shareholders have great power. As state-owned enterprises have their own features, we separately discuss their corporate governance. We also briefly discuss corporate social responsibility in China. Finally, we provide an agenda for future research.
... The state socialism coalition cares mainly about political control of the country's economic lifelines. This goal is most prominent in strategic industries, which include the military, petroleum, telecommunications, and the construction of infrastructure; in these industries, the state socialism coalition typically retains formal ownership control and has the potential to strongly influence firm strategy (Du, Tang, & Young, 2012;Lenway & Murtha, 1994). Coalitions favoring state socialism also make sacrifices in efficiency to promote social welfare. ...
... Previous research documents that even after leaving the state position, the exposure to the same ideology as state actors has a lingering effect on directors with state experience. For instance,Du et al. (2012Du et al. ( : 1561) quote a SASAC official as follows: "Former governmental officials think like governmental officials even after joining boards of directors. They tend to approach questions from a macro-economic perspective, and from the industry-wide perspective. ...
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Institutional theory has explained the greater prevalence of many strategic actions by increases in their legitimacy over time, but it has not explained how firms choose among actions backed by competing institutional logics. We address this topic by linking institutional logics with the theory of organizational coalitions and power to predict how such choices are affected both by external influence (through ownership) and by internal influence (through shared decision making). In particular, we analyze how the old state socialism logic and the new market capitalism logic competed to influence Chinese firms' mergers and acquisitions (M&As). We find that these institutional logics affected M&A decisions via the coalitions committed to each logic - coalitions whose balance of power reflected the external power source of ownership and the internal power source of board representation. We also find that each coalition's strength changed as the market capitalism logic became more established during China's economic transition, and that investors viewed M&As by firms with high state ownership skeptically.
... This is supported by Fu (2015) revealing that favouritism creates ethical dilemmas and, if not dealt with appropriately, it has the potential to demoralise staff and affect performance negatively. Smith et al. (2015) and Du et al. (2012) also indicated that favouritism and bias in performance ratings create tension among employees of different races, ages, genders, political affiliations and positions in the working environment and affect achievements of the organisational goals and objectives. The service delivery in the district clinics is poor or deteriorating as the PNs are demoralised and frustrated about the PMS. ...
Article
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TBackground: The purpose of the performance management system (PMS) is planning, monitoring, evaluation and development of employees to meet the organisational goals and objectives and transform of service delivery to excellence of the organisation. However, public services are deteriorating and implementation of PMS stimulated different views among professional nurses (PNs) in the Mopani district clinics, which warrants exploration and documentation of the findings. Objective: The objective of this study was to explore and describe the PNs’ perceptions towards PMS. Methods: A qualitative, phenomenological research was conducted to explore and describe the nurses’ lived experiences regarding PMS. A purposive sampling method was used. Data collection was done using focus group interviews. Three focus group discussion sessions were conducted, inclusive of six to nine participants in each session. Results: Twenty-two PNs were interviewed. The findings revealed the following themes: PNs’ uncertainty regarding the implementation of PMS, poor implementation of PMS and its process, lack of knowledge and understanding of PMS implementation and its process, and negative attitudes towards the implementation of PMS. Conclusion: PNs perceived PMS negatively. There is a need to improve leadership and management behaviour by enhancing productivity, job satisfaction and organisational commitment. Constructive feedback, training and capacity development, including standardisation and stabilisation of performance instrument, might improve the process.
... To mitigate such tendencies, the league table scores of each SOE is multiplied with an "operational difficulty index" based on total and net assets, sales, total profits, total headcount and the proportion of retired staff to total headcount. As demonstrated by Du, Tang, and Young (2012), the adjustments of league table scores also entail a high degree of subjectivity and SOEs often receive favourable treatment to facilitate the balancing between financial and broader performance aspects of political significance. ...
Article
This paper extends extant research on financialisation, which has mainly evolved in advanced capitalist economies, through an historically informed field study of governance reforms in Chinese state-owned enterprises (SOEs). Mobilising the theory of strategic action fields (SAFs), we conceptualise the evolution of such reforms as a protracted framing process where different actors sought to influence the meanings attributed to shareholder-focussed governance practices. We examine how challengers of extant governance practices, such as the World Bank, and incumbent actors representing the interests of the Chinese state vied for influence over governance reforms and how various regulatory bodies, assuming the role of internal governance units (IGUs), enjoyed varying degrees of success in advancing context-specific governance practices. Shareholder-focussed accounting techniques, such as Economic Value Added (EVA™), played an increasingly salient role in this process. Yet, emerging governance practices primarily came to reflect the interests of the Chinese state in maintaining and increasing the value of state assets whilst preserving its political control of SOEs. We contribute to the literature on financialisation by showing how pressures for shareholder value creation can be channelled into governance practices which attenuate the pervasive effects of financialisation in contemporary society. We also contribute to research on accounting in emerging economies by exploring the under-researched role of IGUs in the local adaptation of "Western" governance practices. We discuss how future studies can bring these bodies of research closer together and extend research on financialisation to a wider range of institutional contexts.
... In other words, they may sacrifice current opportunities in favor of increased future opportunities. These potential promotions may be considered part of the compensation package, although they are non-monetary (Cao et al. 2009;Du et al. 2012). Third, some managers may simply have less ambition for advancement, and therefore simply prefer the quiet life of managing a state owned firm, since such firms are not exposed to the same competitive environment as non-SOEs. ...
Article
https://link.springer.com/article/10.1007/s11156-014-0441-9. We investigate how political influence affects executive compensation using a sample of publicly listed Chinese firms. Our data set allows us to examine the interplay between manager political influence that arises through government service and owner political influence that arises through state ownership, as they affect executive compensation. We find that politically connected executives receive greater excess compensation from non-state owned firms, but not from state owned firms. Furthermore, our findings indicate that politically connected managers are rewarded for improved performance only when owners do not have substantial political influence, which is consistent with manager political influence being related to a form of managerial entrenchment that can be mitigated by owner political influence. Conceptually, this study adds to the agency theory literature in the field of corporate governance, as it highlights the owner–manager conflict of interest using political influence as a balance of power.
... Further, central-government-controlled firms were explicitly required to use reported 2 We do not wish to imply that shareholder value maximization is the sole objective of central-governmentcontrolled Chinese firms. In fact, the evidence in Du et al. (2012) suggests that central-government-controlled firms also have to bear some social responsibilities such as job creation. Nevertheless, as we show later, we do find that central-government-controlled Chinese firms experienced significant structural reforms around 2003 that have significantly increased managerial incentives to maximize shareholder value. ...
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We examine how China's adoption of a new set of Chinese Accounting Standards (CAS) that is substantially converged with the IFRS affects the managerial pay-for-accounting performance sensitivity of publicly listed Chinese firms. We find that central-government-controlled firms adopted an economically significant managerial pay-for-accounting performance sensitivity prior to the new CAS adoption. However, the pay-for-accounting performance sensitivity declined significantly after the new CAS adoption, especially for central-government-controlled firms that were more significantly affected by the new CAS adoption. We do not find similar evidence for local-government-controlled firms whose managers were not subject to economically significant pay-for-accounting performance sensitivity prior to the new CAS adoption. There is no evidence that the difference in results between the two types of firms is due to confounding events. Overall, our results suggest that China's new CAS adoption reduces the stewardship usefulness of financial reporting.
... For example Bol (2011) finds that the desire to avoid information gathering costs and confrontation costs results in incentive-driven bias, specifically centrality bias and leniency bias. Du, Tang, and Young (2012) find that the raters of State-owned Assets Supervision and Administration Commission of the State Council (SASAC) provide politically connected state-owned enterprises with higher ratings to advance their political careers. ...
... They find that connected firms' post-overseas listing performance is worse than that of non-connected firms, and indeed the managers of connected SOEs list their firms overseas for political (private) benefits, as evidenced by the higher probability of receiving political media coverage or a promotion to a senior position following a successful overseas listing than following a domestic listing. Using the government's evaluation scores and ratings given to 63 SOEs directly affiliated to the central government between 2005 and 2007, Du, Tang, and Young (2012) point to another mechanism. They argue that officials with the discretion to adjust evaluation output can treat larger SOEs with politically influential executives more favourably, and in return, they hope for reciprocity from these executives who may later wish to advance their careers. ...
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China’s stock market has gone through major structural changes since its inception in the early 1990s. In this survey article, we review the empirical literature published in 15 leading accounting and finance journals from 1998 to 2013 that documents these important structural changes. In analysing this literature, we focus on the ‘distinctiveness’ of the Chinese stock market compared with developed stock markets (e.g. US) and the research opportunities generated by the China setting. Key themes include China’s share issue privatisation (SIP) reforms, the political connections in privately owned companies, the characteristics of Chinese listed companies and their governance, the regulatory environment reforms in China, and the evolving role played by auditors and other information intermediaries.
... Prior literature has also shown that supervisors provide ratings that are in line with their preferences for certain subordinates. This favorability bias results in the provision of elevated ratings to liked subordinates (Du et al., 2012;Prendergast and Topel, 1996). Finally, rating distortions can result from subordinates' incentives to engage in impression management and influence activities (Higgins et al., 2003;Levy and Williams, 2004). ...
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This study investigates how the weight on subjective performance measures and the achievement of bonus targets affect managers' distributive and procedural fairness perceptions of annual bonus contracts. We argue that the effect of subjectivity on fairness perceptions follows an inverted U-shaped relationship, consistent with the idea that subjectivity increases fairness perceptions when the overall emphasis on subjective measures is relatively low, but that subjectivity decreases fairness perceptions when the overall emphasis on subjective measures is relatively high. We further argue that managers use bonus targets as referent standards, whose achievement increases perceptions of distributive fairness, but not of procedural fairness. We use a time-ordered cross-sectional survey study design to separate the measurement of ex ante contract characteristics from the measurement of actual bonus payments and managers' fairness perceptions, and we find empirical support for our hypotheses. Our study aims to reconcile some of the mixed findings on subjective performance evaluation and sheds new light on the relationship between target achievements and fairness perceptions.
... SOEs are governed by the State-Owned Assets Supervision and Administration Commission (SASAC), which acts as a board of directors, evaluating management performance, and approving investment projects. Furthermore, performance evaluations, salary increases, and career advancement in SOEs often depend on political connections and the rank of the SOE (Du et al. 2012;Hass et al. 2014). SOE management also has very little power to maximize firm value or affect stockholdings. ...
Article
This paper explores how managers’ and supervisors’ equity incentives impact the likelihood of committing corporate fraud in Chinese-listed firms. Previous research has shown that corporate fraud in China is a widespread phenomenon and has severe consequences for affected firms and executives. However, our understanding of the reasons that fraud is committed in a Chinese setting has been very limited thus far. This is an increasingly important topic, because corporate governance is rapidly changing in China, and it is unclear whether adopting the executive compensation practices of the West is appropriate for Chinese firms. We show that managers’ equity incentives increase their propensity to commit corporate fraud. We also find that this effect is more pronounced for state-owned firms. However, we find a negative but not significant relationship between the equity incentives of the supervisory board and the incidence of fraud.
... Some SOEs are also given special 'policy allowances' for undertaking government-sanctioned tasks aimed at upholding social stability and executing specific policy initiatives. Moreover, performance evaluation entails a considerable element of subjectivity and enterprises of high political significance often receive favourable treatment in performance evaluation (Du et al. 2012). This enables the SASAC to exercise a considerable amount of discretion and moderate performance scores such that conflicts between economic and broader social interests can at least be partly accommodated. ...
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This paper contributes to the ongoing debate about the relevance of management accounting. In doing so, we widen the definition of relevance' from the largely managerialist focus dominating this debate to examine how management accounting innovations get imbued with a broader range of societal interests and how actors representing vested interests go about entrenching and resisting such innovations. We explore these issues with reference to the institutionalisation of Economic Value Added (EVA) as a governance mechanism for Chinese and Thai state-owned enterprises. Adopting a comparative, institutional field perspective, we theorise our observations through the conceptual lens of institutional work, or the human agency involved in creating, maintaining and disrupting institutions. We extend extant research on institutional work by exploring how the evolution of such work was conditioned by differences in field cohesiveness, defined in terms of how consistent and tightly coordinated key interests clustered around EVA are. Our analysis also draws attention to how different types of institutional work support and detract from each other in the process of upholding such cohesiveness. We discuss the implications for future research on the societal relevance of management accounting innovations and institutional work.
... Many prior studies, such as [11], show that state-owned firms are inefficient. For example, Dewenter and Malatesta [27] demonstrate that public offerings of state-owned firms are significantly underpriced as these firms are directed not by social welfare improvement, but by political interests and objectives including creating jobs, promoting industrialization, and subsidizing underdeveloped areas of the country [30,42]. In a multi-country setting, La Porta et al. [49] show that state ownership is related to lower economic growth, while Barth et al. [8] show that state ownership of banks are associated with a less developed banking system and security market. ...
Article
This paper investigates the impact of mandatory adoption of the eXtensible Business Reporting Language (XBRL) on performance of listed state-owned enterprises (SOEs) and non-SOEs. Building on the institutional theory, we hypothesize and find that non-SOEs benefit from the adoption of XBRL by operating more effectively which results in better performance. Due to the institutional factors, for SOEs, financial report users still need much more information beyond financial reports before they can make appropriate decisions. Implications on the use of XBRL-formatted financial reporting information for international business with the existence of SOEs in China are discussed.
... Access to the central government can be hugely beneficial. For example, Du et al. (2012) find that the evaluation criteria for central SOEs are subject to the influence of political meddling, which gives politically connected firms an edge in receiving good evaluations. ...
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Vested interests have been blamed for resisting the reform of state-owned enterprises (SOEs) in China. Yet, various interest groups have heterogeneous interests in privatization. Using both firm- and provincial-level data, we find that SOE managers and local bureaucrats—two key players of privatization—have contingent, rather than vested, interests in privatization, depending partly on their political connections with the central government. On the one hand, political connections motivate SOE managers to privatize more state ownership while retaining managerial control. On the other hand, central connections discourage provincial leaders from using privatization to boost their economic performance. These results shed light on the conditions under which China implements its economic reforms. With the increasing embeddedness and declining autonomy for policymakers, the once well-performing developmental state models now face serious challenges as political powerful interest groups can manipulate economic reforms for their own purposes rather than for structural transformation.
... First, politically connected executives have less experience with innovation than unconnected executives, so they will be less skilled at managing R&D and innovation (Fisman and Wang, 2015). Politically connected executives previously worked as state bureaucrats, where the focus is on maintaining control of the political-economic system, while unconnected executives worked in firms that may be more likely to prize innovation. 2 Field interviews by accounting researchers support this expectation: "Former government officials think like government officials even after they join boards of directors….They tend to approach questions from a macro-economic perspective…" (Du, Tang, andYoung, 2012: 1561). Such differences in experience may also underlie the second reason why political connections may hamper innovation: politically connected executives may prefer to enjoy the "quiet life" (Bertrand and Mullainathan, 2003) because their work in the government was generally routine. ...
... Performance evaluation and control systems Aside from the discussion of compensation contracts, several studies investigate performance evaluation and management control systems in China during the 2008-2018 period. Du et al. (2012) show that political connection, the geographic proximity to the State-Owned Assets Supervision and Administration Commission of China (SASAC), and the political rank of state-owned companies can influence performance evaluation. Then, adopting the new performance measures EVA (economic value added) to substitute for ROE (return on equity) can motivate supervisors to consider personal preferences in subjective adjustment decisions. ...
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This study reviews the influential accounting literature on China topics published both in international and Chinese journals in the recent four decades to celebrate the 40th anniversary of the reform and opening up in China. We first review the literature published in the first two decades, where normative research is dominant and financial accounting and managerial accounting are the main topics. Then, looking more in-depth at the most recent literature, we separately discuss the articles published from 1998 to 2007 and from 2008 to 2018, in which many topics are covered including financial accounting, managerial accounting, financial management and corporate governance, auditing and tax. Finally, conclusions and future suggestions are raised based on the issues explored over the past four decades.
... Subjective dimensions being based on supervisors' judgments may lead to distorted evaluations (Moers 2005;Bol 2011;Bol and Smith 2011), data manipulation (Bol 2011), and decreased performance (Ahn et al. 2010;Golman and Bhatia 2012). Supervisors can use evaluation discretion to pursue their own goals (Longenecker et al. 1987;Gibbs et al. 2004) or to reward some subordinates over others based on their personal preferences displaying favouritism (Prendergast and Topel 1996;Ittner et al. 2003;Moers 2005;Du et al. 2012;Bol et al. 2016). Luft et al. (2016) also showed that, in situations of causal ambiguity (i.e., uncertainty) and differences in interpretations of information, adding subjectivity in PE may generate extra costs in the form of coordination failures 5 and negative surprises 6 . ...
Article
Empirical research on the costs and benefits of subjective compared to objective performance evaluations has produced results that remain mixed. To shed light on this debate, we examine the effects of these two types of evaluation on managers’ perceived procedural fairness in different contexts combining uncertainty and trust. The purpose is, on the one hand, to identify whether one type of evaluation is perceived as fairer than the other in certain contexts and, on the other hand, to explore how these fairness judgments are formed. To address these two questions, we analyze quantitative and qualitative data collected from 418 managers with a scenario-based questionnaire. Our results show that subjective evaluations are perceived as fairer than objective ones by managers who are faced with situations of high uncertainty and who trust their superior. Conversely, objective evaluations are perceived as fairer in situations where both trust and uncertainty are low. Our results also show that managers form their fairness judgments by considering two dimensions: they perceive that subjective evaluations give them the opportunity to express their point of view, and that objective evaluations are more accurate and less biased. Overall, these results suggest that organizations can improve their performance evaluation systems, either by using criteria appropriate to the context or by acting on uncertainty and/or trust.
... Prior to the politicization of corporate governance policy, LSOEs are less tightly controlled by the state government than CSOEs, and LSOEs have more freedom to make decisions (Du et al., 2012). Therefore, we conjecture that the politicization of corporate governance would have a greater impact on LSOEs. ...
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We examine whether requiring a Party committee to lead corporate governance at listed state-owned enterprises (SOEs) affects firm value in China. We find that the market reacts positively to the inclusion of Party leadership in SOEs' governance structure and that the prospect of a crackdown on SOE corruption is likely to be the reason. The China governance model is strikingly different from other known models, and our findings suggest that a convergence of the corporate governance system of different countries due to globalization might not be the only outcome.
... For this reason, every decision taken will be able to influence other economic chain conditions starting from the private sector to abroad. In connection with this, State-owned Enterprises (SOEs) also play a role in determining the course of the economy, especially in stimulating growth in the field of industry, diluting opportunities and job vacancies, business and business potential to strengthen the state budget condition through achieving the economy as tax and non-tax revenues (Du, Tang, & Young, 2012;Menozzi, Gutiérrez Urtiaga, & Vannoni, 2011;Wei & Wang, 1997). ...
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Government of Republic of Indonesia has been working to establish and operate the State-Owned Holding Company for Mining sector. There has been a long debate in whether in public, government institution, even in the industry on how this policy would give impact to all stakeholders within the business. While this mining state-owned holding company keep going on its mission to achieve the policy’s objectives, in order to monitor the track we are at, this paper is trying to observe on the potential policy impacts and how can we manage to solve any damage, if there is any, so that the negative implications from the policy can be understood better and well handled by the government as well as the holding.
... Reflecting this finding, the literature has identified a tendency for lower-quality corporate governance and more serious agency problems at SOEs. Related studies have documented that in SOEs, performance evaluations, salary increases and career advancement often depend on political connections and the geographical location of the SOE (Du et al., 2012;Hass et al., 2014;Zhang et al., 2018). Furthermore, an SOE's management typically has very little power to maximize firm value or affect the firm's ownership structure. ...
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This study examines the anti-corruption impact and risk effects of equity incentives on financial misreporting, in the context of China’s unique corporate ownership structure and governance regime. A variety of panel data methodologies has been applied using a sample that comprises 2,638 cases of financial restatement over the period 2007–2017. Our key findings suggest that managers’ shareholdings are significantly and positively associated with their firms’ financial misreporting. Equity risk due to factors such as political events and anti-corruption campaigns, is found to dramatically alter Chinese corporate governance. We also establish that the motivation for managers to manipulate firm performance is significantly more pronounced in non-state-owned enterprises (non-SOEs). This finding suggests that the risk effects associated with equity incentives could mitigate the ‘absence of ownership’ problem that is believed to affect SOEs. Additional analysis shows that managers in highly competitive industries and firms with low institutional ownership are also highly motivated to misreport their performance. The policy implications of the evidence are significant for the design of appropriate corporate governance systems for listed firms in China.
... Investigating executive pay in a sample of Chinese firms, Chen et al. (2011b) find that political power, measured as the duality of the functions of executive and party secretary, is related to higher executive compensation. Drawing on social identity theory, Du et al. (2012) argue that politically connected executives of Chinese SOEs have a higher level of affinity with officials from the State-Owned Assets Supervision and Administration Commission of China who evaluate them. In line with this argument, they present evidence that political connection positively affects the subjective performance evaluation executives receive from the commission. ...
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A large stream of research has analyzed the effects of corporate political connections (CPCs) on firms, including first evidence on their effects on financial reporting behavior. However, the evidence so far is inconclusive, and attempts to explain the causality of effects on reporting are limited. In this article, we present the results of a systematic review of the literature on CPCs. We draw on findings in the accounting, finance, and economics literature and derive a framework that identifies four channels through which CPCs affect financial reporting. Our review of the literature suggests that effects of political connections tend to be more ambiguous than suggested by individual studies that often offer directional hypotheses. We also identify eight distinct types of political connectedness and discuss their interrelations and the proxies used in the literature to measure them.
... Government authority exists in almost all major functions of state-owned enterprises (SOEs) through the representation of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) at the central and local levels. As Du et al. (2012) pointed out, SASAC closely supervises the use of state-owned assets through frequent audits, drafts organizational regulations and laws, and has the right to appoint, dismiss, and evaluate CEOs. At the same time, Chinese SOEs control important sectors, enjoy favorable political connections and better access to institutional resources than non-SOEs (Y. ...
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This study examines the association between CEO temporal focus and corporate engagement in philanthropy, and considers the moderating role of ownership. This association is investigated based on upper echelons theory and the conceptual framework of temporal focus. Using a sample of 2,285 observations of Chinese listed firms from 2010 to 2015, our results show that the relationship between CEO past focus and corporate philanthropy is positive in state-owned firms but negative in private firms. In addition, CEO future focus is negatively associated with charitable activities in state-owned firms, but positively associated with such activities in private companies. For present-oriented CEOs, the relationship between temporal focus and philanthropy is negative in both public and private firms, but the negative effect is stronger in private firms. The findings of this study show how CEOs’ time perspectives shape their decisions on company engagement in philanthropic projects.
... To attain such a personal promotion, Chairmen and CEOs of local and provincial SOEs would also more actively respond to the governmentinitiated low-carbon policy. However, the performance evaluation of centrally controlled SOEs is executed by a central administration, the State-Owned Assets Supervision and Administration Commission of China, which has no jurisdictional relationship with local governments (Du et al., 2012). In addition, local enterprises are subject to the supervision and control of local policies, and the local government may consider allocating more authorizations to institutions under its direct control to promote policy implementation. ...
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Enterprises are the market players for carbon reductions and carbon trading, and they are also the significant driving force in a low-carbon economy and society. Using the data of A-share listed companies from 2010 to 2016, this study uses a difference-in-differences (DID) model to examine the effects of the low-carbon city construction on corporate carbon reduction performance. Consistent with our hypotheses, we find that the low-carbon city construction promotes corporate carbon reduction performance. Further analysis indicates that the policy effect is stronger for state-owned enterprises (SOEs) than non-state-owned enterprises (non-SOEs). Moreover, environmental quality can affect the promotion of local government officials, which is more prominent in pilot low-carbon cities, and political promotion incentives significantly improve corporate carbon reduction performance. Furthermore, the highest emission reduction effects come in the fourth year after adopting a carbon reduction policy and are concentrated among the firms in the eastern region. Overall, our findings offer a new point view for a deeper understanding of the improvement of corporate carbon reduction performance, and provide microscopic evidence for the objective evaluation of the environmental effects of China's low-carbon city pilot policies.
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Performance evaluations are typically based on a formula that specifies in advance all performance measures, their relative incentive weights, and targets to be met. However, beginning-of-year performance targets can become outdated due to unforeseen events, which calls for ex post adjustments to formula-based incentive plans to restore incentives. We discuss three types of ex post incentive plan adjustments—end-of-year subjective performance evaluation, changes in next-year relative incentive weights, and changes in next-year performance targets—and empirically examine the extent to which they are used to discourage failure to meet a target by a wide margin. Specifically, we use 2004–2015 data on formula-based bonus plans, subjective performance evaluations, and performance in Korean state-owned enterprises. Consistent with our predictions, we find that very low performance relative to target is associated with (i) low subjective evaluations and (ii) an increase in next-year incentive weights, which renders areas with poor performance more important in future evaluations. These findings are more pronounced on performance dimensions of high importance and less pronounced when very low performance is due to an adverse uncontrollable shock. Finally, we find evidence that ex post incentive plan adjustments are associated with future performance improvements. Combined, our findings suggest that ex post incentive plan adjustments can be used to strengthen incentives when performance targets get outdated. This article is protected by copyright. All rights reserved.
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State-owned enterprises represent approximately 10% of global gross domestic product. Yet they remain relatively underexplored by management scholars. Firms have often been viewed dichotomously as either state owned or privately owned. Today, however, we encourage a more nuanced view of state-owned enterprises as hybrid organizations, in which the levels of ownership and control by the state can vary. Drawing on 36 cases from four industries in 23 countries, we lay the groundwork for a richer understanding of state-owned enterprises by management scholars in the future.
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This paper explores how notions of enhanced shareholder orientation influenced the evolution of management control practices in a Chinese state-owned enterprise over a ten-year period. Drawing on the social movement literature and adopting a historically informed field study approach we examine how this took the form of a protracted framing process where an emerging, shareholder-focused frame interacted with the extant work unit frame embedded in Maoist ideology and the broader cultural system of Confucianism and imbued control practices with context-specific meanings. Particular attention is paid to how this interplay fostered varying degrees of frame alignment, denoting the extent to which particular frames are congruent with those enacted by various social actors, and how this affected organisational action. We illustrate how the shareholder-focused frame challenged extant control practices but was also complemented and ultimately replaced by the work unit frame to address an escalating performance crisis. These findings lead us to reflect on how resistance to shareholder-focused control practices is brought about and what roles alternative and more deeply embedded frames play in constraining as well as enabling collective action. We also discuss how the approach to framing informing our analysis may complement cognate accounting research drawing on notions of performativity and social psychology.
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Drawing on the notion of guanxi, which is obligation-bound, in Confucian cultures, this study investigates whether rating leniency and rating compression in performance evaluation are based on supervisor–subordinate acquaintanceship, alma mater ties, and subordinates' physical proximity to their supervisor. After controlling for supervisor–subordinate gender similarity and age difference, this study first finds that public sector supervisors are willing to provide relatively lenient ratings and compressed ratings for their subordinates when their personal acquaintanceship with them is strong, and when there is close physical proximity between them. Second, an alma mater connection with a subordinate leads to rating leniency by the supervisor. Finally, it is worth noting where this study differs from Bol's research (from Western cultures). In particular, while Bol, J.C. [2011. The determinants and performance effects of managers’ performance evaluation biases. The Accounting Review, 86 (5), 1549–1575] demonstrates that age differences between supervisors and subordinates decrease rating leniency, this study documents insignificant results for similar demographic characteristics in age and gender. Bol, J.C. [2011. The determinants and performance effects of managers’ performance evaluation biases. The Accounting Review, 86 (5), 1549–1575] also demonstrates that if a private sector supervisor sharing a work location with subordinates faces relatively lower information-gathering costs, he or she will give less lenient and less compressed ratings. However, this study shows opposite findings for the guanxi norm in Confucian societies.
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Purpose – Strategic group has been intensively studied since this term emerged in 1970s, but previous studies have been limited to the comparisons between groups such as performance comparison. The purpose of this paper is to explore the internal structure of strategic groups by examining the effect of strategic distance from a firm to the center of its strategic group on firm performance. Design/methodology/approach – The research is based on data acquired from the annual reports of listed companies and some Chinese domestic databases, including CSMAR Solution, WIND financial database, and China Core Newspapers Full-text Database. After grouping listed pharmaceutical companies in China over the period 2010-2011, the authors test three hypotheses by using fixed effect regressions. Findings – The paper finds that the strategic distance from a firm to the center of its strategic group has a significant negative effect on the firm's financial performance. Two factors are discovered to influence that effect: corporate diversification strengthens the negative effect of strategic distance on performance, while firm's media visibility weakens that negative effect. Originality/value – The findings reveal the relationship between intra-group strategic positioning and firm performance, and specify how firms can gain competitive advantage through positioning choices and strategic actions. This study promotes the establishment of a more comprehensive strategic group theory by revealing the structure within strategic groups.
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Many firms simultaneously develop multiple alliances with different partners and face the challenges of managing a complex alliance portfolio that contains both strong and weak ties. How does this dispersion of tie strength affect alliance portfolio performance? This study examines the effect of tie strength dispersion on alliance portfolio performance, as well as the contingent effects of CEOs’ experience. The empirical analyses, using a dataset consisting of 748 funds initiated by 62 fund management firms over a 10‐year period (2002–2011), reveal an inverted U‐shaped relationship between tie strength dispersion and alliance portfolio performance. The analyses also reveal that CEOs’ political experience weakens, while their international experience strengthens, this inverted U‐shaped relationship.
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In order to increase global competition, the merger among domestic financial industry has appeared (merged) since Taiwan joining WTO in 2002. The main purpose of this study is to examine the operating performance and the embedded risk factors for these organizations after affiliation. In this study, Data Envelopment Analysis (DEA) model was applied for performance measurement. Input and output were used to collect relevant information (secondary data) to conduct empirical research. The results showed that risk factors have positive impact on efficiency, especially the overall efficiency and technical efficiency. Although the beginning efficacy and end efficacy were not obvious, the overall efficacy was no significantly influenced. However, the means was decreasing because not every short period of consolidation is absolutely efficient, arising out of, two banks before acquisition, each with their different corporate cultures, and some non-financial factors. But the long-term synergies, the acquisition of commercial banks in Taiwan is to help the growth of both its banking financial or non-financial aspects of the surface, for both long-term helpful extraordinary.
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Purpose This paper aims to develop and test a conceptual model of supplier selection decisions in the public sector. The study seeks to determine the relative importance of a broad range of non-economic variables in explaining supplier selection decisions during strategic organizational purchases. Design/methodology/approach Data were collected from a national sample of 341 senior staff and top management team (TMT) members in 40 public sector organizations in Nigeria by using structured questionnaires. Findings Results of structural equation modeling (SEM) analysis shows that government policy requirements, social ties of organizational actors, party politics, decision-makers’ experience and the perception of instrumental ethical work climates are the most important determinants of strategic supplier selection decisions, followed in a descending order of importance by the perception of rules ethical work climates, self-enhancement personal values, CEOs’ structural position, self-transcendent personal values and the perception of time pressure. Findings also indicate that the choice of a supplier per se is not an important determinant of organizational performance. Originality/value No prior study has brought together, in a single model, the broad range of variables employed in this study with a view to exploring their relative importance in explaining public sector supplier selection decisions in a non-western country context. The findings of this study have implications for Marketing Managers looking to do business with public sector firms in emerging markets.
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The objective of this monograph is to review prior studies and propose new research directions for the corporate governance of Chinese listed firms. The focus of this monograph is to investigate the underlying relation between China's institutional environment and its listed firms' corporate governance, and to show how formal and informal governance mechanisms actually work within these firms. A top-down institutional framework is adopted to integrate prior research and guide us in identifying first-order factors that shape the corporate governance practice in China. Following this institutional framework, I propose a number of research directions that study the formal and informal governance approaches unique to China's environment.
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We study how state ownership affects the post-merger performance of Chinese acquirers, and find that state owned acquirers (SOEs) experience a significantly larger long-term performance improvement following mergers compared to their non-state-owned counterparts (NSOEs). When partitioning the sample period into acquisitions made prior to and following China's split-share reform of 2005, we find that the post-merger performance improvement of SOE acquirers is largely attributed to the post reform period in which controlling shareholders converted their non-tradable shares into tradable status. Our results are consistent with the interpretation that state intervention in the form of capital market liberalization and alleviation of governance problems, combined with political connections and privileged access to financing may have a positive effect on M&A performance that outweighs the inefficiency cost of state ownership in China.
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We examine whether the corporate control market is an important governance mechanism that the controlling shareholders of publicly listed Chinese SOEs employ to improve the performance of less efficiently run Chinese SOEs. Using an econometric methodology advocated by Maddala (1983), we show that expected future performance improvement is an important consideration in publicly listed Chinese SOEs’ control transfer decisions. This result holds for both state-to-private and state-to-state control transfers and the effect is stronger for publicly listed Chinese SOEs domiciled in provinces with stronger institutional environments. There is also preliminary evidence that the firms other than the control transfer target controlled by the acquiring ultimate owners are more efficiently run than the firms controlled by the selling ultimate owners. Overall, our results suggest that the Chinese Government actively uses the corporate control market to help improve the performance of publicly listed Chinese SOEs.
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Using U.S. Department of Justice data on state‐level political corruption, we find that banks charge higher loan spreads (all‐in‐drawn spread [AIDS]) to firms in states with higher corruption and that these effects are more pronounced for firms facing financial constraints but less pronounced for firms experiencing greater external monitoring. These results are robust to additional controls, alternate corruption measures, a measure of the lack of oversight of lobbyist activities, and the use of instrumental variables. Overall, our findings are consistent with the harmful corruption environment hypothesis, which states that banks charge higher loan spreads to firms in states with greater political corruption environments as these firms are susceptible to making suboptimal financial decisions to fend off rent‐seeking behavior. This article is protected by copyright. All rights reserved.
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Objetivo do estudo: o objetivo do artigo é identificar se a familiaridade e a localização geográfica do fornecedor influenciam a decisão de compra em uma organização do Sistema S. Metodologia/abordagem: pesquisa experimental de vinheta, de abordagem quantitativa. A técnica estatística de análise utilizada foi a Regressão Linear Múltipla para identificar os efeitos que as variáveis independentes exercem na decisão de compra. Principais Resultados: verificou-se que as variáveis quando analisadas separadamente não apresentaram significância, contudo, a interação entre as variáveis foi significante e, portanto, as hipóteses foram parcialmente atingidas, confirmando a existência de relação entre elas. Os resultados indicaram que quanto maior a Familiaridade de compra com o fornecedor, menor é o efeito de sua Localização na decisão de compra. Contribuições teóricas/metodológicas: o estudo contribui à literatura de compras e gestão da cadeia de suprimentos do Sistema S, uma vez que identifica o papel comportamental dos compradores dessas organizações no momento da escolha de compra. Relevância/originalidade: o estudo contribui para fortalecer o campo de estudos do processo de decisão de compra em organizações do Sistema S. Percebe-se a relevância da gestão da cadeia de suprimentos nessas organizações, pois houve influência de variáveis comuns dentro da rede de relacionamento e envolvidas nos processos de fornecimento e aquisição organizacional. Palavras-chave: Gestão da Cadeia de Suprimentos. Seleção do Fornecedor. Decisão de Compra. Familiaridade. Localização do Fornecedor.
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This study investigates formal institutional pressure from government policy, informal institutional pressure from filial piety, and their interaction effect on firms' internationalization strategy. We argue that, while influenced by independent policy and cultural effects, firms also exercise agency when responding to these competing institutional pressures. We find empirical support for the influence of policy and cultural effects on firms' foreign direct investment (FDI). We also find that, in making decisions about FDIs, state‐owned enterprises are more sensitive to government policy, whereas family businesses are more sensitive to filial piety. This study reveals that firms' strategies in complex institutional environments are influenced by their needs for formal and informal institutional legitimacy. Managers can exercise agency by weighing the importance of formal and informal legitimacy differently and therefore vary in their responses to institutional pressures. However, managerial agency is bound by firm ownership type. Managers of state‐owned firms prioritize formal institutional legitimacy, while their family business counterparts attend more to informal institutional legitimacy. Policymakers should be aware of this important difference between types of firms, which allows them to address noncompliance in a culturally sensitive and ultimately more effective way.
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This study involved analysis of incidents describing influence attempts from the perspective of an agent or a target. Influence behavior in the incidents was coded into nine influence tactics. A conceptual framework was presented to explain the selection and sequencing of tactics, and the model was used to derive specific hypotheses for individual tactics. Analysis of tactic combinations revealed that some tactics were used together much more often than others. Consistent with the model, some tactics were used more in initial influence attempts, and other tactics were used more in follow-up influence attempts. Differences in the use of tactics with subordinates, peers, and superiors were also consistent with the model, and the results verified directional differences found in earlier research with questionnaires.
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When policy arrangements appear to favor well-organized and wealthy interests, should we infer of the political process? In particular, might larger firms receive regulatory even when the regulatory agency is not captured by producers? I model regulatory approvalas a repeated optimal stopping problem faced by a learning regulator subject to variable political pressure. The model is general but stylistically applied to pharmaceutical regulation. Under the assumption that consumers are differentially organized, but producers are not, there nonetheless exist two forms of for larger, older producers. First, firms submitting more applications may expect quicker and more likely approvals, even in cases where their reputations for safety are below industry average. Second, to an exclusive market niche (disease) receive shorter expected approval times than later entrants, even when later entrants offer known quality improvements. The findings extend to cases of bounded rationality and a reduced form of endogenous firm submissions. The model shows that even interest-neutral regulation can generate protectionist outcomes, and that commonly adduced evidence for capture is often observationally equivalent to evidence for other models of regulation.
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This study examines two questions: when do firms make greater use of subjectivity in awarding bonuses, and what are the effects of subjectivity on employee pay satisfaction and firm performance? We examine these questions using data from a sample of 526 department managers in 250 car dealerships. First, the findings suggest that subjective bonuses are used to complement perceived weaknesses in quantitative performance measures and to provide employees insurance against downside risk in their pay. Specifically, use of subjective bonuses is positively related to: (1) the extent of long-term investments in intangibles; (2) the extent of organizational interdependencies; (3) the extent to which the achievability of the formula bonus target is both difficult and leads to significant consequences if not met; and (4) the presence of an operating loss. Second, we find that the effects of subjective bonuses on pay satisfaction, productivity, and profitability are larger the greater the manager's tenure, consistent with the idea that subjectivity improves incentive contracting when there is greater trust between the subordinate and supervisor.
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Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined use of subjective and objective performance measures in (respectively) implicit and explicit incentive contracts. We show that the presence of sufficiently effective explicit contracts can render all implicit contracts infeasible, even those that would otherwise yield the first-best. We also show, however, that in some circumstances objective and subjective measures are complements: neither an explicit nor an implicit contract alone yields positive profit, but an appropriate combination of the two does. Finally, we consider subjective weights on objective measures.
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This paper examines the role of affiliation with the ruling Communist Party in the operation of private enterprises in China. Using a nationwide survey of private firms, we find that the Party membership of private entrepreneurs has a positive effect on the performance of their firms when human capital and other relevant variables are controlled. We further find that Party membership helps private entrepreneurs to obtain loans from banks or other state institutions, and affords them more confidence in the legal system. Finally, we find Party membership to be more important to firm performance in regions with weaker market institutions and weaker legal protection.
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Almost 27% of the CEOs in a sample of 790 newly partially privatized firms in China are former or current government bureaucrats. Firms with politically connected CEOs underperform those without politically connected CEOs by almost 18% based on three-year post-IPO stock returns and have poorer three-year post-IPO earnings growth, sales growth, and change in returns on sales. The negative effect of the CEO's political ties also show up in the first-day stock return. Finally, firms led by politically connected CEOs are more likely to appoint other bureaucrats to the board of directors rather than directors with relevant professional backgrounds.
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In a setting in which corporate headquarters dictates total sales targets, we study how supervisors allocate sales targets to individual stores. Specifically, we analyze whether supervisors strategically use discretion in the target-setting process to address compensation contracting issues. We first examine whether supervisors use discretion to manage compensation risk. The results are consistent with the agencytheoretic prediction that supervisors provide easier targets to stores facing higher levels of store-specific risk. Next, we examine whether discretion is used to mitigate fairness concerns. The results suggest that, consistent with behavioral arguments, supervisors use discretion to deal with fairness issues, even if the area of the supervisor's discretion is not the source of the fairness concerns. Finally, we analyze whether supervisors use discretion in the target-setting process to reduce their potential confrontation costs. Consistent with research in psychology, we find that supervisors provide easier targets to store managers with relatively higher hierarchical status.
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The abstract for this document is available on CSA Illumina.To view the Abstract, click the Abstract button above the document title.
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Members of organizations spend considerable time, effort, and ingenuity attempting to influence decision makers. Such influence activities may bring benefits to the organization, but they also involve real costs. This essay offers an economic rationale for such influence activity as representing rational, self-interested behavior in the presence of informational asymmetries and an analysis of how the design of the organization's structure and polices should respond to the incentives for attempting influence. It is posited that information valuable for the organization's decision making is directly available only to members of the organization who have some personal stake in the decisions. These individuals may then have an incentive to try to manipulate the information they develop and provide in order to influence the resulting decision to their benefits. This can be costly both in degrading the quality of decision making and in diverting the attention and effort of the organization's members from more productive activities. The organization has three different methods it can employ to discourage excessive influence activities and to encourage more directly productive uses of time and effort. It can limit access to decision makers and participation in decision making; it can alter its decision-making criteria to favor those performing well in productive activities; and it can provide direct financial incentives to encourage the desired allocation of effort. It is shown that an efficiently deisgned organization will use such financial incentives only as a last resort. Instead, it will always first alter its decision-participation polices and decision-making criteria.
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This paper reports the findings of a field study aimed at providing a better understanding of how and why managers of corporations with multiple divisions set the levels of achievability of annual profit center budget targets. The data, gathered from 54 profit centers in 12 corporations, show that most budget targets are set to be achievable an average of eight or nine years out to ten. This finding contrasts with the prescription made in most management accounting textbooks suggesting that for optimum motivation budget targets should be achievable less than 50 percent of the time. Managers maintain, however, that these highly achievable targets provide considerable challenge, and the high achievability actually provides many advantages, including improved corporate reporting, resource planning, control, and, combined with other control system elements, even motivation.
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Employment relationships provide fertile ground for both employee and employer opportunism. Employers worry about whether employees will devote sufficient effort to work, and employees are concerned about whether employers will compensate them appropriately. In this paper, we examine whether employer discretion over the size of the total employee compensation pool and the allocation of this pool among employees influences employee and employer opportunism. The results of our experiment indicate that firm output and employees' compensation are greater when the employer does not have discretion over total employee compensation, but does have discretion over the allocation of total compensation. We find that the employer's residual profit increases with discretion over the allocation of compensation among employees; however, we find no effect on residual profit of the employer's discretion over the total amount of employee compensation. Our results suggest that firms benefit from a compensation contract that establishes total employee compensation as a predetermined function of public, aggregate measures such as accounting income, but provides the employer at least some discretion to allocate this compensation using private information. However, our results caution that employees and employers may not have similar preferences for the degree of employer discretion over the determination of total employee compensation.
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There is no evidence to support the belief that training raters to change rating distributions will increase accuracy or validity. Such training may merely promote a temporary and situation-specific response set. We call for a new emphasis in rater training programs on: (1) diary-keeping procedures to increase observational skills; (2) the establishment of a common rater frame of reference to enhance agreement on what constitutes effective job performance; and (3) mastery-based training to increase rater self-efficacy regarding negative appraisal situations.
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Empirical studies of distributive politics fail to offer any systematic evidence of a relationship between committee seniority in Congress and the geographic distribution of federal benefits. These findings are at odds with many descriptive accounts of the seniority norm for which such a relationship is a presupposition. Evidence and intuition appear at odds with each other. This study offers a partial reconciliation. The death of Senator Henry "Scoop" Jackson provides the somewhat macabre backdrop to a novel empirical examination of the seniority/benefit relationship. Evidence is provided through stock market reactions to Jackson's death across various constituent interests of Henry Jackson and Sam Nunn, Jackson's successor as ranking minority member on the Senate Armed Services Committee. The results support the hypothesis that a seniority/benefit relationship exists.
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Four alternative techniques are commonly used for measuring the halo effect (HE) in performance appraisal: dimension intercorrelations, factor analysis, raters ×  ratees interaction, and rating dispersion. This study tested the equivalence of these techniques by measuring possible differences in their respective estimates of HE when 2 variables were manipulated: the global impression held by the ratee (poor vs excellent) and status relative to the rater (superior, colleague, or subordinate). 125 Israeli managers were asked to assess, on a 7-dimension form, an outstanding and a poor superior and subordinate colleague with whom they had worked. Findings indicate that the different measures of halo were differentially influenced by the manipulated variables. The intercorrelation and factor analysis measures yielded no significant differences among ratee groups, while both the standard deviation and the interaction measures were affected by the 2 manipulated variables. Findings suggest that HE may be divided into 2 distinguishable types: covariance, reflected by intercorrelation and factor analysis methods; and co-occurrence, measured by the interaction and dispersion methods. The conceptual meaning of these types of HE and the factors to which they are differentially sensitive are discussed. (15 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Managerial bonus payments are frequently determined by both objective and subjective indicators of managerial performance. By its very nature, subjective information is not verifiable for contracting purposes. The inclusion of such information in managerial bonus schemes therefore requires a principal to retain discretion in authorizing actual bonus payments. At the same time, the principal must be able to commit to an overall bonus pool which will be paid out either inside or outside the agency. Our analysis examines the structure of optimal bonus pool arrangements. The non-verifiability of the subjective indicators changes many of the predictions obtained in traditional agency settings with verifiable performance indicators. In particular, our results address the contractual value of additional information variables, the desirability of compressed incentive schemes and the nature of relative performance evaluation in settings with multiple agents.
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Research indicates that bonus plans can provide effective incentives when managers use discretion to incorporate non-contracted information into performance evaluations. The use of managerial discretion, however, draws concern about whether non-contracted information is used appropriately in performance evaluations (Baiman and Rajan 1995; Fisher et al. 2005). This paper provides experimental evidence regarding the decision processes through which managers apply discretion in allocating bonus pools. Additionally, we investigate whether the design of the bonus plan affects managers' bonus allocations. Our theory and evidence suggest that managers rely on an anchoring and adjustment heuristic to allocate bonus pools and that the bonus plan type (i.e., whether managers have full or partial discretion) influences managers' choice of anchor information. Regardless of anchor information, managers' subsequent adjustment is insufficient, resulting in a failure to fully incorporate non-contracted information. Even for those managers who do not rely on an anchoring and adjustment heuristic but instead attempt to perform comprehensive calculations, only those with full discretion fully incorporate non-contracted information.
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In assessing the performance of the CEO, subjectivity by the board of directors is often present in one form or another. We specifically focus on: (1) the ex ante option to ex post override a formula-based contract (“discretionary bonus”), and (2) the ex ante absence of any formula in a contract (“subjective weights”). We argue that the two types of deviations are driven by different contracting problems, which relate to whether post-contract information does or does not affect the agent's optimal action choice. We refer to these different contracting problems as problems of risk and problems of noncongruity, respectively, and hypothesize that discretionary bonuses are used for risk-reduction purposes, while subjective weights on different performance dimensions are used for congruity-improvement purposes. Our results are consistent with our expectations, showing that the use of the different types of subjectivity is consistent with optimal contracting considerations. Data Availability: All data are publicly available from the sources identified in the text.
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This study examines how different types of performance measures were weighted in a subjective balanced scorecard bonus plan adopted by a major financial services firm. Drawing upon economic and psychological studies on performance evaluation and compensation criteria, we develop hypotheses regarding the weights placed on different types of measures. We find that the subjectivity in the scorecard plan allowed superiors to reduce the "balance" in bonus awards by placing most of the weight on financial measures, to incorporate factors other than the scorecard measures in performance evaluations, to change evaluation criteria from quarter to quarter, to ignore measures that were predictive of future financial performance, and to weight measures that were not predictive of desired results. This evidence suggests that psychology-based explanations may be equally or more relevant than economics-based explanations in explaining the firm's measurement practices. The high level of subjectivity in the balanced scorecard plan led many branch managers to complain about favoritism in bonus awards and uncertainty in the criteria being used to determine rewards. The system ultimately was abandoned in favor of a formulaic bonus plan based solely on revenues.
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We examine the role of discretion in executive incentive contracts, and explore the trade-offs firms face in choosing among imperfect objective measures of individual performance, potentially more accurate but non-verifiable subjective measures, and overly broad objective measures of company-wide performance that include the performance of all agents in the firm. We generate implications and test the model empirically using a proprietary dataset of executive bonus plans. Consistent with our model, we find that discretion is less important in determining CEO pay than the pay of other executives. We also find that discretion is relatively important in determining executive bonuses at larger and privately held firms and that more diversified firms are relatively less likely to compensate their business unit managers based on firm-wide performance. Finally, we consider (and largely dismiss) tax-related explanations for our results.
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ABSTRACTI provide evidence that geographically proximate analysts are more accurate than other analysts. Stock returns immediately surrounding forecast revisions suggest that local analysts impact prices more than other analysts. These effects are strongest for firms located in small cities and remote areas. Collectively these results suggest that geographically proximate analysts possess an information advantage over other analysts, and that this advantage translates into better performance. The well-documented underwriter affiliation bias in stock recommendations is concentrated among distant affiliated analysts; recommendations by local affiliated analysts are unbiased. This finding reveals a geographic component to the agency problems in the industry.
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The present study demonstrated that the presence of evaluatively polarized context performances not only produces contrast and halo effects on judgments of a target performance, but also causes judgments to be made much faster. Processing speed and positive halo were highly correlated, supporting the notion that halo in performance ratings results from raters' recall and use of a single, general impression. Furthermore, regression analyses demonstrated that processing speed mediates the relationship between context and halo. The relationship between these findings, halo, processing speed, and general impressions, as well as implications for performance appraisals, are discussed.
Article
A dealer needs access to order flow and information to make a market profitably in a Nasdaq stock. Several variables that proxy for the stocks that an individual market maker's brokerage customers trade, including volume, location, underwriting participation and analyst coverage, are significant determinants of market making activity. Informational advantages may also factor in the market making decision as evidenced by dealers specializing in industries. These findings suggest that individual dealers have competitive advantages in making markets in specific stocks, and that potential market making competition comes from the dealers who share those advantages rather than all Nasdaq market makers.
Article
The onset of the Asian financial crisis in Malaysia reduced the expected value of government subsidies to politically connected firms, accounting for roughly 9% of the estimated $60 billion loss in their market value from July 1997 to August 1998. Firing the Deputy Prime Minister and imposing capital controls in September 1998 primarily benefited firms with strong ties to Prime Minister Mahathir, accounting for roughly 32% of these firms’ estimated $5 billion gain in market value during September 1998. The evidence suggests Malaysian capital controls provided a screen behind which favored firms could be supported.
Article
Although researchers have indicated the potential importance of rater motivation for understanding and improving performance appraisal processes, little empirical research or conceptual writing has addressed this topic. The purpose of this paper is to offer a model of the antecedents and outcomes of appraiser motivation, and suggest hypotheses for research. Researchers are encouraged to conduct further research on this important issue.
Article
Applying a geographic lens to mutual fund performance, this study finds that fund managers earn substantial abnormal returns in nearby investments. These returns are particularly strong among funds that are small and old, focus on few holdings, and operate out of remote areas. Furthermore, we find that while the average fund exhibits only a modest bias toward local stocks, certain funds strongly bias their holdings locally and exhibit even greater local performance. Finally, we demonstrate that the extent to which a firm is held by nearby investors is positively related to its future expected return. Our results suggest that investors trade local securities at an informational advantage and point toward a link between such trading and asset prices.
Article
Objective measures of employee performance are rarely available. Instead, firms rely on subjective judgments by supervisors. Subjectivity opens the door to favoritism, where evaluators act on personal preferences toward subordinates to favor some employees over others. Firms must balance the costs of favoritism--arbitrary rewards and less productive job assignments--against supervisors' demands for authority over subordinates. The authors analyze the conditions under which favoritism is costly to organizations and the effects of favoritism on compensation, the optimal extent of authority, and the use of bureaucratic rules. Copyright 1996 by University of Chicago Press.
Article
If outside directors with backgrounds in politics and in law play a political role, they will be more important on the boards of firms for which politics matters more. We conduct three tests. First, for a sample of manufacturing firms, we find that politically experienced directors are more prevalent in firms where sales to government, exports, and lobbying are greater; lawyer-directors are more prevalent in firms where costs of environmental regulation are higher; and both are more prevalent in larger firms. Second, for a sample of electric utilities during the 1990s, when the advent of retail competition made politics more important, we find increased incidence of politically experienced directors. Finally, we explore whether a governmental taste for diversity creates a political role for women directors. Although we document increased incidence of women directors over time, we find little evidence that women directors play a political role. Copyright 2001 by the University of Chicago.
Article
Corruption by the politically connected is often blamed for economic ills, particularly in less developed economies. Using a loan-level data set of more than 90,000 firms that represents the universe of corporate lending in Pakistan between 1996 and 2002, we investigate rents to politically connected firms in banking. Classifying a firm as "political" if its director participates in an election, we examine the extent, nature, and economic costs of political rent provision. We find that political firms borrow 45 percent more and have 50 percent higher default rates. Such preferential treatment occurs exclusively in government banks-private banks provide no political favors. Using firm fixed effects and exploiting variation for the same firm across lenders or over time allows for cleaner identification of the political preference result. We also find that political rents increase with the strength of the firm's politician and whether he or his party is in power, and fall with the degree of electoral participation in his constituency. We provide direct evidence against alternative explanations such as socially motivated lending by government banks to politicians. The economy-wide costs of the rents identified are estimated to be 0.3 to 1.9 percent of GDP every year. Copyright (c) 2005 Massachusetts Institute of Technology.
Article
The role of imperfect information in a principal-agent relationship subject to moral hazard is considered. A necessary and sufficient condition for imperfect information to improve on contracts based on the payoff alone is derived, and a characterization of the optimal use of such information is given.
Article
We examine the impact of geographical proximity on the acquisition decisions of US public firms over the period 1990-2003. Transactions where the acquirer and target firms are located within 100 km of each other are classified as local transactions. We find that acquirer returns in local transactions are more than twice that in non-local transactions. The higher return to local acquirer is not explained by related, either horizontal or vertical, industry transactions, and appears to be related to information advantages arising from geographical proximity. These information advantages facilitate acquisition of targets that, on average, create higher overall return. The higher return to local acquirers is preserved by the use of target termination fee contracts.
Article
The study aims to investigate the determinants of subjective bonus payouts in the UK financial industry. Bonuses are increasingly linked to wider business goals, such as quality and customer service, firm reputation and employee hiring and retention policies, thus replacing the traditional focus on output or profit measures. A new conceptual work on subjectivity is used to evaluate these bonus practices. Results indicate that a variety of contextual factors have influenced the firms to make greater use of subjectivity in bonus payouts. Of these, organizational interdependency appeared to be the most forceful factor, followed by management’s strategic focus, long-term investment in intangibles, economic constraints, performance target difficulty, and competition. The analysis suggests that subjectivity acts as a mechanism that aligns the interests of individual employees with the firm’s performance goals. The study also draws attention to the costs of subjectivity in performance evaluation.
Article
Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
Article
We test the assertion that a consequence of voluntarily adopting International Accounting Standards (IAS) is the enhanced ability to attract foreign capital. Using a unique database that reports firm-level holdings of over 25,000 mutual funds from around the world, our multivariate tests find that average foreign mutual fund ownership is significantly higher among IAS adopters. We also find that IAS adopters in "poorer information environments" and with "lower visibility" have higher levels of foreign investment, consistent with firms using IAS adoption to provide more information and/or information in a more familiar form to foreign investors. Taken together, our findings are consistent with voluntary IAS adoption reducing home bias among foreign investors and thereby improving capital allocation efficiency. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2007.
Article
The strong bias in favor of domestic securities is a well-documented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several well-documented asset pricing anomalies. Copyright The American Finance Association 1999.
Article
This paper extends the standard principal-agent model to allow for subjective evaluation. The optimal contract results in more compressed pay relative to the case with verifiable performance measures. Moreover, discrimination against an individual implies lower pay and performance, suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination. Finally, the optimal contract entails the use of bonus pay rather than the threat of dismissal, hence neither "efficiency wages" nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract.
Article
As the Indonesian economy went into a downward spiral in the latter half of 1997, there was much speculation and debate as to the reasons behind the sudden decline. Most explanations gave at least some role to investor panic, which had led to a massive outflow of foreign capital. At the root of this hysteria, however, were concerns that the capital that had flowed into Indonesia and elsewhere in Southeast Asia had not been used for productive investments. Much of this discussion focused on the role of political connections in driving investment. The claim was that in Southeast Asia, political connectedness, rather than fundamentals such as productivity, was the primary determinant of profitability and that this had led to distorted investment decisions. Obviously, the degree to which this type of problem was truly responsible for the Asian collapse depends very much on the extent to which connectedness really was a primary determinant of firm value. In making the argument that this was in fact the case, anecdotes about the business dealings of President Suharto’s children were often cited as evidence. Such stories suggest that the value of some firms may have been highly dependent on their political connections. However, investigations in this area have not progressed beyond the level of case study and anecdote. That is, there has been no attempt to estimate the degree to which firms rely on connections for their profitability. There are numerous difficulties that would
Article
We empirically investigate possible distortions in subjective performance evaluations. A key hypothesis is that evaluations are more upward biased the closer the social ties between supervisor and appraised employee. We test this hypothesis with a company data set from a call center organization which contains not only subjective assessments but also several more objective measures of performance. Controlling for these performance measures, we find strong evidence that evaluations are upwards biased in smaller teams and some evidence that supervisors give better ratings to employees they themselves have evaluated before.
Article
This paper empirically examines the effect of firm-specific characteristics on the length of time required by the Food and Drug Administration (FDA) to review and approve new-drug applications between 1990 and 1992. The approach treats regulatory decisions as endogenous and explains the variation in regulatory behavior as a function of differences that exist between firms and drugs. Results show that, controlling for drug-specific characteristics, regulators respond to firm-specific characteristics when evaluating new drug applications. For instance, firms that are less diversified and more R&D-inten-sive receive shorter review times for their new-drug applications than more diversified and less R&D-intensive firms. The reason is that most firm characteristics signal information to reviewers about either firm reputation or application quality. This information reduces reviewers' uncertainty about approving a dangerous or ineffective drug and leads to faster review times. The results suggest that regulators respond to the heterogeneities among firms in the pharmaceutical market in systematic ways. Copyright (c) 1997 Massachusetts Institute of Technology.
Article
A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave. Many common features of organizational incentive systems are not easily explained by traditional economic theory---including egalitarian pay systems in which compensation is largely independent of performance, the overwhelming use of promotion-based incentive systems, the absence of up-front fees for jobs and effective bonding contracts, and the general reluctance of employers to fire, penalize, or give poor performance evaluations to employees. Typical explanations for these practices offered by behaviorists and practitioners are distinctly uneconomic---focusing on notions such as fairness, equity, morale, trust, social responsibility, and culture. The challenge to economists is to provide viable economic explanations for these practices or to integrate these altern...
Taking the Wheel- auto parts and the political economy of industrialization in Brazil
  • J R Ramalho
Ramalho J.R. , 2001. Taking the Wheel- auto parts and the political economy of industrialization in Brazil. Journal of Latin American Studies 33, 436