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Hierarchical Inconsistency: A Monitoring Mechanism to Reduce Securities Fraud in Emerging Markets
Abstract
Research has indicated limited effects of formal governance measures on securities fraud prevention in emerging markets due to the weak rule of law. We propose that hierarchical inconsistency, misaligned rank ordering in formal organizational and informal social hierarchies of the corporate elite, can provide a novel monitoring mechanism to reduce securities fraud. Leaders at the top of the two inconsistent hierarchies can feel distressed and motivated to engage in contestation and challenge each other’s authority, thus providing checks and balances and preventing groupthink. This monitoring effect is likely to be stronger when either of the two heads has dominant and unequivocal superiority in their respective hierarchy, making them particularly distressed by the hierarchical inconsistency and prone to contest. We test our argument in the context of publicly listed family-controlled firms in China, where business and family hierarchies may confer superiority to different individuals. Our study contributes to the corporate securities fraud literature by understanding how formal organizational structures and informal social relationships interact and jointly influence governance effectiveness in emerging markets.
Funding: This work was supported by the Strategic Management Society [2015 SRF Dissertation Research Grant], Rudolf and Valeria Maag research funds, and INSEAD alumni funds.
This study examines the impact of social networks on corporate fraud. We contend that firms’ network embeddedness increases the expected cost of fraud, which in turn reduces the likelihood of committing fraud. Using data on the network of Chinese listed firms between 2007 and 2019, we find evidence that firms with a higher degree of network embeddedness are less likely to engage in fraudulent activities, suggesting the governance role of social networks. Further analyses reveal that this negative relationship is stronger when the firm faces more intense market competition, has more interactions with partners, or receives more media coverage. Our findings are robust to instrument variable regression, controlling for firm-fixed effects, alternative measures of network embeddedness, and addressing the partial observation problem. This study provides novel insights into the determinants of corporate fraud from a network perspective.
We build upon the approach/inhibition theory of power to explain why and when CFO ranking in top management team (TMT) informal hierarchy may be related to entrepreneurial firm initial public offering (IPO) fraud, a typical type of unethical behavior with potential benefits and costs. Our theory explains why CFOs with high rankings in TMT informal hierarchy tend to have a high level of psychological sense of power and may pay more attention to potential benefits rather than costs of unethical behaviors, resulting in a high likelihood to engage in fraud during IPO process. We further suggest that the positive relationship between CFO ranking in TMT informal hierarchy and entrepreneurial firms IPO fraud is weakened by CEO narcissism (internal environment) and environmental dynamism (external environment), respectively. Based on a sample of Chinese entrepreneurial firms listed in growth enterprise market from 2010 to 2017, we find support for our theoretical predictions. By focusing on the “specialist” executives—CFOs—the findings suggest the need to consider rankings in TMT informal hierarchy when analyzing the antecedents of IPO fraud.
Conventional wisdom has regarded low self-esteem as an important cause of violence, but the opposite view is theoretically viable. An interdisciplinary review of evidence about aggression, crime, and violence contradicted the view that low self-esteem is an important cause. Instead, violence appears to be most commonly a result of threatened egotism—that is, highly favorable views of self that are disputed by some person or circumstance. Inflated, unstable, or tentative beliefs in the self’s superiority may be most prone to encountering threats and hence to causing violence. The mediating process may involve directing anger outward as a way of avoiding a downward revision of the self-concept.
Drawing on status characteristics theory, we explore how boards’ social structures influence board turnover. We theorize that (1) understanding directors’ relative standing and spheres of influence in the local status hierarchy creates deference structures that reduce conflict and enhance stability, thereby reducing board turnover; and (2) shared performance expectations and attraction based on homophily in the global status hierarchy can also reduce conflict and enhance stability, and thus serve as another means of reducing board turnover. Using data on the five years following the initial public offerings (IPOs) of 218 firms that went public between 2001 and 2005, we find that overlaps in directors’ local status characteristics captured by their tenure and expertise and directors’ global status homogeneity increase the likelihood of director exit. However, the combinations of directors’ local and global shared specific status characteristics shape the relative salience of the positive or negative effects of board’s local status characteristics, leading to different effects on board turnover.
We examine how actors react to status inconsistencies across multiple status hierarchies. We argue that pluralistic value systems create multiple status conferral mechanisms, and that hierarchies’ prestige varies as a function of the values they represent. While status inconsistency, in general, increases the likelihood that actors will pursue opportunities that can boost their lagging status, their status hierarchies’ unequal prestige influences the magnitude and direction of actors’ responses to their status inconsistency. Further, their ability to do so is constrained by their relative standing in their primary status hierarchy and the extent to which they are embedded in particular professional networks. Using the artistic and commercial status of Hollywood performers, we found that status-inconsistent performers were more likely to appear in films that could boost their lagging status in the commercial hierarchy when they possessed relatively higher artistic than commercial status. Moreover, being high-status decreased the likelihood a performer would pursue opportunities that could improve their lagging status only when they were high status in the artistic status hierarchy, while embeddedness only decreased the likelihood when their primary status hierarchy was commercial.
The authors perform one of the first empirical tests of the moral virtue theory of status attainment (MVT), a conceptual framework for showing that morality leads to status. Studies 1a to 1d are devoted to developing and validating a 15-item status attainment scale (SAS) to measure how virtue leads to admiration (virtue-admiration), how dominance leads to fear (dominance-fear), and how competence leads to respect (competence-respect). Studies 2a and 2b are an exploration of the nomological network and discriminant validity to show that peer-reported virtue-admiration is positively related to moral character and perceptions such as perceived warmth and unrelated to amoral constructs such as neuroticism. In addition, virtue-admiration mediates the positive effect of several self-reported moral character traits, such as moral identity-internalization, on status conferral. Study 3 supports the external validity of the virtue route to status in a sample of fulltime managers from China. In Study 4, a preregistered experiment, virtue evokes superior status while selfishness evokes inferior status. Perceivers who are high in moral character show stronger perceptions of superior status. Finally, Study 5, another preregistered experiment, shows that virtue leads to higher status through inducing virtue-admiration rather than competence-respect, even for incompetent actors. The findings provide initial support for MVT arguing that virtue is a distinct, third route to status. (PsycINFO Database Record (c) 2019 APA, all rights reserved).
This study explores how financial executives retrospectively account for their crossing the line into financial statement fraud while acting within or reacting to a financialized corporate environment. We conduct our investigation through face-to-face interviews with 13 former C-suite financial executives who were involved in and indicted for major cases of accounting fraud. Five different themes of accounts emerged from the narratives, characterizing executives’ fraud immersion as a meaning-making process by which the particulars of the proximal social context (the influence of social actors and contextual characteristics) and individual motivations collectively molded executives’ vocabularies of fraud immersion. Our executives’ narratives portray their fraud entanglement as typically occurring in small, incremental steps. Their accounts expand our understanding of the influence of socialization on executive-level financial fraud beyond the individualized focus of the fraud triangle model.
Integrating relational embeddedness arguments with Penrosean growth theory, we compare the growth of firms run by spousal entrepreneurs with firms run by sibling entrepreneurs. We theorize that trust, identification, and mutual obligations-the three facets of relational embeddedness-are more pronounced in spousal teams than in sibling teams, which provides spousal teams with advantages over sibling teams in generating firm growth. Probing a sample of all private firms in Sweden over a three-year period, we find support for this conjecture. Exploring boundary conditions to this baseline relationship, we also find that firm age weakens the growth advantages of spousal teams over sibling teams and that industry experience heterogeneity within the entrepreneurial team reinforces these growth advantages. These results provide important contributions for research on firm growth, the social embeddedness of firms, entrepreneurship, and family business.
Is there a compensation gap between female CEOs (She’-E-Os) and male CEOs? If so, are there mechanisms to mitigate the compensation gap? Extending role congruity theory, we argue that the perception mismatch between the female gender role (that assumes communal traits) and the leadership role (that assumes agentic traits) may lead to lower compensation to female CEOs, resulting in a gender compensation gap. Nevertheless, the compensation gap may be narrowed if female CEOs display agentic traits through risk-taking, or alternatively, work in female-dominated industries where communal traits are valued. Additionally, we expect that female CEOs’ risk-taking is less effective in reducing the gender compensation gap in female-dominated industries due to the conflicting emphases on agentic and communal traits. Leveraging a sample of Chinese publicly listed firms, we find support for our hypotheses. Overall, this study contributes to the ethics literature on income inequality issues, by highlighting the effectiveness of potential mechanisms to close the gender compensation gap between female and male CEOs.
While moral character heavily influences global evaluations of others (Goodwin, Piazza, & Rozin, 2014), its causal effect on perceptions of others’ competence (i.e., one’s knowledge, skills, and abilities) is less clear. We found that people readily use information about another’s morality when judging their competence, despite holding folk intuitions that these domains are independent. Across 6 studies (n = 1,567), including 2 preregistered experiments, participants judged targets who committed hypothetical transgressions (Studies 1 and 3), cheated on lab tasks (Study 2), acted selfishly in economic games (Study 4), and received low morality ratings from coworkers (Study 5 and 6) as less competent than control or moral targets. These findings were specific to morality and were not the result of incidentally manipulating impressions of warmth (Study 4), nor were they fully explained by a general halo effect (Studies 2 and 3). We hypothesized that immoral targets are seen as less competent because their immoral actions led them to be viewed as low in social intelligence. Studies 4 and 5 supported this prediction, demonstrating that social intelligence was a more reliable mediator than perceptions of self-control or general intelligence. An experimental test of this mediation argument found that presenting targets as highly socially intelligent eliminated the negative effect of immoral information on judgments of competence (Study 6). These results suggest that information about a person’s moral character readily influences perceptions of their competence.
Organization members who engage in "moral objection" by taking a principled stand against ethically questionable activities help to prevent such activities from persisting. Unfortunately, research suggests that they also may be perceived as less warm (i.e., pleasant, nice) than members who comply with ethically questionable procedures. In this article, we draw on role theory to explore how legitimate power influences observers' responses to moral objection. We argue that individuals expect those high in legitimate power to engage in moral objection, but expect those low in legitimate power to comply with ethically questionable practices. We further propose that these contrasting role expectations influence the extent to which moral objectors are perceived as warm and subjected to social sanctions (i.e., insults, pressure, unfriendly behavior). We test our predictions with 3 experiments. Study 1, which draws on participants' prior workplace experiences, supports the first section of our mediated moderation model in which the negative association between an actor's moral objection (vs. compliance) and observers' warmth perceptions is weaker when the actor is high rather than low in legitimate power and this effect is mediated by observers' met role expectations. Study 2, an online experiment featuring a biased hiring task, reveals that the warmth perceptions fostered by the Behavior × Legitimate Power interaction influence observers' social sanctioning intentions. Finally, Study 3, a laboratory experiment which exposes participants to unethical behavior in a virtual team task, replicates Study 2's findings and extends the results to actual as well as intended social sanctions. (PsycINFO Database Record
Recent research in social psychology has examined how psychological power affects organizational behaviors. Given that power in organizations is generally viewed as a structural construct, I examine the links between structural and psychological power and explore how their interrelationships affect organizational behavior. I argue that psychological power takes two forms: the (nonconscious) cognitive network for power and the conscious sense of power. Based on this view, I identify two causal pathways that link psychological power and structural power in predicting organizational behavior. First, the sense of power is likely to induce a sense of responsibility among (but not exclusively among) structural powerholders, which in turn leads structural powerholders to be more responsive to the views and needs of others. Second, the sense of power, when brought into conscious awareness, activates a non-conscious association between power and agentic behaviors, which in turn leads structural powerholders to enact agentic behaviors. I discuss the ways in which these predictions diverge from previous theorizing, and I address methodological challenges in examining the relationship between structural and psychological power. In doing so, I suggest that certain features of the predominant methodological approaches to studying psychological power may have induced a bias in the empirical findings that obscures the crucial link between power and responsibility.
We investigate how initial status position influences the quality of task performance in the aftermath of status loss. We argue that despite the benefits of having status, high-status individuals experience more self-threat-challenges or contradictions to a central view of the self-and, consequently, have more difficulty performing well after status loss than do low-status individuals who experience a comparable loss of status. In a field study of professional baseball players (Study 1), we found that although low-status players' performance quality was unaffected by status loss, the quality of high-status players' performance declined significantly after losing status. In a high-involvement group experiment (Study 2), we found that high-status individuals who lost status were less proficient than both high-status individuals who did not lose status and low-status individuals who lost a comparable amount of status. However, supporting self-threat as the proposed psychological process, self-affirmation restored the quality of high-status individuals' performance (Study 3). We discuss the practical and theoretical implications of these findings.
Beside making organizations look like their peers through the adoption of similar attributes ("alignment"), this paper highlights the fact that conformity also enables organizations to stand out by exhibiting highly salient attributes key to their field or industry ("conventionality"). Building on the conformity and status literatures, and using the case of major U.S. symphony orchestras and the changes in their concert programming between 1879 and 1969, we hypothesize and find that middle-status organizations are more aligned and middle-status individual leaders make more conventional choices than their low- and high-status peers. In addition, the extent to which middle-status leaders adopt conventional programming is shown to be moderated by the status of the organization and by its level of alignment. Thus, this paper offers a novel theory and operationalization of organizational conformity, and contributes to the literature on status effects, and, more broadly, to the understanding of the key issues of distinctiveness and conformity.
We consider boards as human groups in the uppermost echelon of corporations and examine how an informal hierarchy that tacitly forms among a firm's directors affects firm financial performance. This informal hierarchy is based on directors' deference for one another. We argue that the clarity of the informal hierarchy can help coordinate boardroom interactions and thereby improve the likelihood of the board's contributing productively to the firm's performance. We further identify a set of internal and external contingencies affecting the functioning of the informal hierarchy. Our analysis of seven-year panel data on 530 U.S. manufacturing firms provides support for our arguments.
At the pinnacles of organizations, comparative tests of unity of command and shared command are nearly impossible because only one individual sits atop most organizations. In organizations led by co-CEOs, however, such a test is possible because co-CEOs can truly share power. But do they? Our research pits the unity-of-command principle against the shared-command principle and finds overall support for the former, even within the co-CEO context. Our sample of 71 co-CEO pairs at publicly traded U.S. firms shows that increasing power gaps between co-CEOs are positively associated with firm performance. This positive association wanes and turns negative, however, as power gaps become very large. We conclude that whatever benefits the co-CEO structure might offer likely lie outside the shared command paradigm.
Research Summary
Strategic management has seen numerous studies analyzing interaction terms in nonlinear models since Hoetker's (2007) best‐practice recommendations and Zelner's (2009) simulation‐based approach. We suggest an alternative recentering approach to assess the statistical and economic importance of interaction terms in nonlinear models. Our approach does not rely on making assumptions about the values of the control variables; it takes the existing model and data as is and requires fewer computational steps. The recentering approach not only provides a consistent answer about statistical meaningfulness of the interaction term at a given point of interest, but also helps to assess the effect size using the template that we offer in this study. We demonstrate how to implement our approach and discuss the implications for strategy researchers.
Managerial Summary
In industry settings, the relationship between multiple corporate strategy‐related inputs and corporate performance is often nonlinear in nature. Furthermore, such relationships tend to vary for different types of firms represented within the broader population of firms in a given industry. It is thus imperative for managers to know how to take nonlinear relationships between related business factors into account when they make strategic decisions. We suggest a simple and easily implementable way of assessing and interpreting interactions in a nonlinear setting, which we term a recentering approach. We demonstrate how to apply our approach to a strategic management setting.
Research Summary
Strategic leadership scholars have produced consistent evidence that the CEO effect on firm performance depends on the latitude of actions CEOs enjoy in their particular context. We argue that as the governance leaders of their firms, board chairs choose a firm's objectives more than they do its actions. As a result, the board chair effect should vary with latitude of objectives, rather than latitude of actions. We explore this possibility by comparing the board chair effect in two countries with relatively high latitude of objectives—Germany and China—with the board chair effect in two countries with relatively low latitude of objectives—the United States and United Kingdom. Results confirm that latitude of objectives influences the effect of board chair heterogeneity on firm performance.
Managerial Summary
Do board chairs matter to different degrees in different countries? Building on prior work showing that U.S. board chairs account for a significant portion of firm performance, we collected data on board chairs from four different countries to find out if this effect differs by institutional environment. We find that board chairs matter for firm performance across countries, but that board chairs in Germany and China exhibit a considerably larger effect on firm performance than do board chairs in the United States and United Kingdom. We interpret these findings as evidence that board chairs enjoy wider discretion with regard to organizational objectives in Germany and China than they do in the United States and United Kingdom.
“Over the years, I have had the opportunity to teach several regression courses, and I cannot think of a better undergraduate text than this one.” -The American Statistician “The book is well written and has many exercises. It can serve as a very good textbook for scientists and engineers, with only basic statistics as a prerequisite. I also highly recommend it to practitioners who want to solve real-life prediction problems.” (Computing Reviews) Modern Regression Methods, Second Edition maintains the accessible organization, breadth of coverage, and cutting-edge appeal that earned its predecessor the title of being one of the top five books for statisticians by an Amstat News book editor in 2003. This new edition has been updated and enhanced to include all-new information on the latest advances and research in the evolving field of regression analysis. The book provides a unique treatment of fundamental regression methods, such as diagnostics, transformations, robust regression, and ridge regression. Unifying key concepts and procedures, this new edition emphasizes applications to provide a more hands-on and comprehensive understanding of regression diagnostics. New features of the Second Edition include: A revised chapter on logistic regression, including improved methods of parameter estimation A new chapter focusing on additional topics of study in regression, including quantile regression, semiparametric regression, and Poisson regression A wealth of new and updated exercises with worked solutions An extensive FTP site complete with Minitab macros, which allow the reader to compute analyses, and specialized procedures Updated references at the end of each chapter that direct the reader to the appropriate resources for further study An accessible guide to state-of-the-art regression techniques, Modern Regression Methods, Second Edition is an excellent book for courses in regression analysis at the upper-undergraduate and graduate levels. It is also a valuable reference for practicing statisticians, engineers, and physical scientists.
Decisions about conforming to or deviating from conventional practices in a field are an important concern of organization and management theory. The position that actors occupy in the status hierarchy has been shown to be an important determinant of these
decisions. The dominant hypothesis, known as “middle-status conformity,” posits that middle-status actors are more likely to conform to conventional practices than high- and low-status actors do. We challenge this hypothesis by revisiting its fundamental assumptions and developing a theory according to which actors’ propensity to conform based on their achieved status further depends on the ascribed status that they inherit from their social group. Specifically, we propose that middle-status conformity applies
only to actors who have a sense of security, based on their high ascribed status. Regarding actors with low ascribed status, we propose that high- and low-status actors show greater conformity than middle-status actors. We test our hypotheses using data
from the U.S. symphony orchestras from 1918 to 1969.
This study focuses on the market identities of firms and suggests that identity ambiguity is caused not only by bridging horizontal product categories but also by status inconsistency stemming from bridging vertical status categories. Focusing specifically on how firms reduce status inconsistency by restructuring their business portfolios, we argue that status inconsistency motivates firms to divest business units to present a more coherent vertical market identity. Emphasizing the interplay between horizontal and vertical identity ambiguity, we argue furthermore that status-inconsistent units that are related to the core business units within a firm are more likely to be divested. Using a comprehensive sample of publicly traded U.S. firms from 1998 to 2014, we report that status inconsistency increases the likelihood of divestiture that decreases status inconsistency, particularly for high-status firms. Moreover, although status-inconsistent units are generally more likely to be divested, this effect is stronger for core business units.
This paper was accepted by Greta Hsu, organizations.
How corporate governance mechanisms function in transition economies is a key topic for corporate governance researchers and policy makers. We propose that alternative governance mechanisms are in place to mitigate corporate fraudulent behaviors in the fluid state of transition economies where the establishment and enforcement of corporate governance legislation are presently insufficient. Drawing on the twin set of institutional logics—the institutional embeddedness logic and the institutional substitution logic—we posit that three salient types of prevailing alternative governance mechanisms (relational, administrative, and foreign governance) play important roles in transition economies because they are complementary to the institutional conditions at the time of the transition process. Conducting a bivariate probit analysis of a matched sample of corporate financial fraud cases in China, we find that strategic alliances, business group affiliation, nontradable state shares, local government ownership, use of foreign auditors, and foreign listing can deter corporate financial fraud, while foreign listing is also effective in detecting fraud. We also find that the deterrence effects of strategic alliances and business group affiliation become weaker as law development improves, while foreign listing and legal governance are completely substitutive. Our study provides a contextualized view of corporate governance that connects its effectiveness with institutionalization and the institutional state of a country. Our study also enriches our understanding of some unfamiliar forms of governance mechanisms that are in place and complementary to a country’s institutional conditions.
This study examines the consequences of status inconsistency for the performance of multi-unit organizations. Status inconsistency refers to the extent to which social actors occupy status positions accorded different amounts of social esteem and prestige in different social systems. Status inconsistency affects the performance of multi-unit organizations by weakening the well-established positive effects of status on performance because it creates status ambiguity that makes external evaluations of the organization and its individual units more difficult. Distinguishing between high-status and low-status multi-unit organizations, we argue further that status inconsistency is particularly problematic for high-status multi-unit organizations, whereas low-status multi-unit organizations may actually benefit from status inconsistency. We test our arguments using a longitudinal sample comprised of 109 international business schools and their finance, accounting, marketing, management, and operations departments from 2002 to 2013. Our study concludes with a discussion of the contributions our research makes to status theory and research, and the managerial relevance of our findings.
Research summary: Corporate scandals of the previous decade have heightened attention on board independence. Indeed, boards at many large firms are now so independent that the CEO is “home alone” as the lone inside member. We build upon “pro‐insider” research within agency theory to explain how the growing trend toward lone‐insider boards affects key outcomes and how external governance forces constrain their impact. We find evidence among S&P 1500 firms that having a lone‐insider board is associated with (a) excess CEO pay and a larger CEO‐top management team pay gap, (b) increased likelihood of financial misconduct, and (c) decreased firm performance, but that stock analysts and institutional investors reduce these negative effects. The findings raise important questions about the efficacy of leaving the CEO “home alone.”
Managerial summary: Following concerns that insider‐dominated boards failed to protect shareholders, there has been a push for greater board independence. This push has been so successful that the CEO is now the only insider on the boards of more than half of S&P 1500 firms. We examine whether lone‐insider boards do in fact offer strong governance or whether they enable CEOs to benefit personally. We find that lone‐insider boards pay CEOs excessively, pay CEOs a disproportionately large amount relative to other top managers, have more instances of financial misconduct, and have lower performance than boards with more than one insider. Thus, it appears that lone‐insider boards do not function as intended and firms should reconsider whether the push towards lone‐insider boards is actually in shareholders' best interests. Copyright © 2017 John Wiley & Sons, Ltd.
We formulate theory and set forth a first-ever empirical analysis of the impact of board of director gender diversity on the broad spectrum of securities fraud, generating three main insights. First, the examined data show strong evidence consistent with the view that the importance of women on boards in mitigating securities fraud lies in the mechanism of diversity itself, such that the optimal percentage of women on boards is 50% with respect to minimizing securities fraud. We find less direct support for the alternative proposition that women are more ethically sensitive and less likely to risk committing fraud, such that the optimal percentage of women on boards would be 100% with respect to mitigating securities fraud. Second, we show that the market response to fraud from a more gender-diverse board is significantly less pronounced. Third, we show that women are more effective in mitigating both the presence and severity of fraud in male-dominated industries, which again supports the notion of diversity. All our findings are robust to controls for endogeneity and propensity score matching, among other robustness checks.
R esearch summary : Agency theory suggests that external governance mechanisms (e.g., activist owners, the market for corporate control, securities analysts) can deter managers from acting opportunistically. Using cognitive evaluation theory, we argue that powerful expectations imposed by external governance can impinge on top managers' feelings of autonomy and crowd out their intrinsic motivation, potentially leading to financial fraud. Our findings indicate that external pressure from activist owners, the market for corporate control, and securities analysts increases managers' likelihood of financial fraud. Our study considers external governance from a top manager's perspective and questions one of agency theory's foundational tenets: that external pressure imposed on managers reduces the potential for moral hazard .
M anagerial summary : Many of us are familiar with stories about top managers “cooking the books” in one way or another. As a result, companies and regulatory bodies often implement strict controls to try to prevent financial fraud. However, cognitive evaluation theory describes how those external controls could actually have the opposite of their intended effect because they rob managers of their intrinsic motivation for behaving appropriately. We find this to be the case. When top managers face more stringent external control mechanisms, in the form of activist shareholders, the threat of a takeover, or zealous securities analysts, they are actually more likely to engage in financial misbehavior . Copyright © 2016 John Wiley & Sons, Ltd.
Research summary : A firm's strategic investments in knowledge‐based assets through research and development ( R&D ) can generate economic rents for the firm, and thus are expected to affect positively a firm's financial performance. However, weak protection of minority shareholders, weak property rights, and ineffective law enforcement can allow those rents to be appropriated disproportionately by a firm's powerful insiders such as large owners and top managers. Recent data on Chinese publicly listed firms during 2007–2012 were used to demonstrate that the expected positive relationship between knowledge assets and performance is weaker in transition economies when a firm's ownership is highly concentrated and its managers have wide discretion. Moreover, rent appropriation by insiders was shown to vary with the levels of institutional development in which a firm operates .
Managerial summary : Investing in knowledge‐based intangible assets (e.g., R&D ) is an important value‐creation activity for the firm. Such value creation process can be facilitated by large shareholders and powerful managers, who can then take an advantageous position with critical insider information on these valuable intangible assets and therefore enjoy more opportunities to appropriate more value from them, leaving less value for other minority shareholders. The value distribution becomes increasingly skewed against minority shareholders when the institutional protection for them is weak. Indeed, in a large sample of Chinese publicly listed firms, we found that R&D investment becomes less positively associated with firm financial performance with the presence of large shareholders, high managerial equity, or CEO / C hairman duality, especially in Chinese provinces with weak institutional development . Copyright © 2016 John Wiley & Sons, Ltd.
This analysis considers the impact of the top managers in an organization on the organization's outcomes, specifically strategic choices and performance levels. The focus is not on the chief executive alone, but rather on the entire top management team. Using a macro view, these organizational outcomes are perceived to be related to the values and cognitive bases of those high-power individuals in the organization. In developing the model, emphasis is on the background characteristics of the top managers as opposed to the psychological dimensions. A series of propositions that should be tested to support the upper echelons theory are presented. The topics of these propositions include age, functional track, other career experiences, education, socioeconomic roots, financial position, and group characteristics. The creation of this model is just the beginning of the work that is necessary to evaluate and understand the upper echelons theory. Further input is needed from areas such as the executive recruiting industry. Additionally, clinical and statistical studies are both necessary to fully develop this theory. (SRD)
This paper provides an overview of control function (CF) methods for solving the problem of endogenous explanatory variables (EEVs) in linear and nonlinear models. CF methods often can be justifi ed in situations where "plug- in" approaches are known to produce inconsistent estimators of parameters and partial effects. Usually, CF approaches require fewer assumptions than maximum likelihood, and CF methods are computationally simpler. The recent focus on estimating average partial effects, along with theoretical results on nonparametric identifi cation, suggests some simple, fl exible parametric CF strategies. The CF approach for handling discrete EEVs in nonlinear models is more controversial but approximate solutions are available. © 2015 by the Board of Regents of the University of Wisconsin System.
In this study, I examine the association between the credibility of the financial reporting system and the quality of governance mechanisms. I use a sample of 87 firms identified by the SEC as fraudulently manipulating their financial statements. Consistent with prior research, results indicate that fraud firms have poor governance relative to a control sample in the year prior to fraud detection. Specifically, fraud firms have fewer numbers and percentages of outside board members, fewer audit committee meetings, fewer financial experts on the audit committee, a smaller percentage of Big 4 auditing firms, and a higher percentage of CEOs who are also chairmen of the board of directors. However, the results indicate that fraud firms take actions to improve their governance, and three years after fraud detection these firms have governance characteristics similar to the control firms in terms of the numbers and percentages of outside members on the board, but exceed the control firms in the number of audit committee meetings. I also investigate whether the improved governance influences informed capital market participants. The results indicate that analyst following and institutional holdings do not increase in fraud firms, suggesting that credibility was still a problem for these firms. However, the results also indicate that firms that take actions to improve governance have superior stock price performance, even after controlling for earnings performance. This suggests that investors appear to value governance improvements.
Power is accompanied by a sense of entitlement, which shapes reactions to self-relevant injustices. We propose that powerful people more strongly expect to be treated fairly and are faster to perceive unjust treatment that violates these expectations. After preliminary data demonstrated that power leads people to expect fair outcomes for themselves, we conducted four experiments. Participants primed with high (vs. low) power were faster to identify violations of distributive justice in which they were victims (Study 1). This effect was specific to self-relevant injustices (Study 2) and generalized to violations of interpersonal justice (Study 3). Finally, participants primed with high power were more likely to take action against unfair treatment (Study 4). These findings suggest a process by which hierarchies may be maintained: Whereas the powerless are comparatively less sensitive to unfair treatment, the powerful may retain their social standing by quickly perceiving and responding to self-relevant injustices.
© 2015 by the Society for Personality and Social Psychology, Inc.
Corporate philanthropy is expected to positively affect firm financial performance because it helps firms gain sociopolitical legitimacy, which enables them to elicit positive stakeholder responses and to gain political access. The positive philanthropy-performance relationship is stronger for firms with greater public visibility and for those with better past performance, as philanthropy by these firms gains more positive stakeholder responses. Firms that are not government-owned or politically well connected were shown to benefit more from philanthropy, as gaining political resources is more critical for such firms. Empirical analyses using data on Chinese firms listed on stock exchanges from 2001 to 2006 support these arguments.
The upper echelons of publicly traded family firms can comprise family members and non-family members. Due to ownership and control factors, family members often wield significant influence in the upper echelons. If non-family members lack sources of influence, they may exhibit lower participation. Limited participation by non-family members lowers access to and integration of knowledge from non-family members, thus lowering the ability to devise strategic actions that increase performance. Drawing on the structural basis of power, we set out that greater equality in structural power (or compensation, status, and representation) across family and non-family top management team members increases performance in family firms. Moreover, we posit that this relationship is stronger under increasing environmental dynamism and higher governance performance, but weaker under the presence of a founder CEO. Using a sample of 231 publicly traded family firms, representing 1,934 firm-year observations from 2001 to 2010 and controlling for endogeneity, we find support for these proposed relationships.
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Opportunities for financial reporting fraud arise because of information asymmetries—often labeled “lack of transparency”—between top managers and their diverse shareholders. We evaluate the relative contributions of information asymmetries arising from industry-level and firm-level complexities to the likelihood of top managers committing financial reporting fraud. Using a sample of 453 matched pairs of firms that have and have not been identified as having committed financial reporting fraud, we found that information asymmetries arising from industry- and firm-level complexities increase the likelihood of financial fraud. Moreover, more CEO stock options increase the likelihood of fraud when industry complexity is high, while aggressive monitoring by the audit committee reduces the likelihood of reporting fraud when firm-level complexity is high.
This study examines social discrimination in the attributions that top executives make about the performance of other firms with minority CEOs in their communications with journalists. Drawing from the literatures on intergroup relations and status competition, our theory suggests how out-group biases and negative forms of envy toward higher-status minority CEOs may increase the propensity for white male CEOs to make negative or internal attributions for the low performance of the minority CEOs' firms. We also examine how CEOs' internal attributions in conversations with journalists increase the tendency for those journalists to attribute performance to internal causes in reporting on the minority CEOs' firms. We consider how the gender and race of journalists could moderate the influence of CEOs' performance attributions on journalists' reports, such that female or racial minority journalists would be less easily persuaded by white male CEOs' internal attributions for the low performance of firms with female or racial minority CEOs, and thus less prone to issuing negative statements about the CEOs' leadership. Empirical analyses based on original survey data from a large sample of CEOs and journalists provided strong support for our hypotheses. We discuss implications of the findings for theory and research on social discrimination in the corporate elite and social psychological determinants of corporate leader reputation.
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The stressful impact of status inconsistency on the individual is examined with national survey data, using expressed psychophysiological symptoms as the indicator of psychological disturbance. Inconsistency due to racial-ethnic rank superior to occupational or educational rank is associated with high symptom levels; although the opposite patterns of inconsistency are not, they have been shown in previous research to be associated with political liberalism. These findings are interpreted to mean that all forms of status inconsistency are psychologically disturbing, but that response to this stress varies with the relative positions of the inconsistent person's achieved and ascribed status ranks and with his achieved status per se. Also, sex appears to influence response to occupation--education inconsistencies. These findings provide support for a multi-dimensional view of social stratification.
As adults, children from single-parent families have less success in school, lower earnings, and lower occupational prestige than children reared in interact, two-parent families. An abundant literature supports such a claim even when controls are introduced for such things as the income of the single parent, the educational attainment of the single parent, the years spent in a single-parent family, the age at which the disruption of the child's family occurred (in the case of divorce or separation), the type of single-parent family (divorced/never-married parent), the child's race, and a host of other, seemingly important background factors. Still, the attainment deficits persist. In this article an explanation for part of this deficit is advanced. It is proposed that one reason why children of one-parent families achieve less as adults is that they lack exposure to hierarchical models of authority relations in their families. The family serves as the prototype of all authority relationships. By virtue of living in nonhierarchical families, children from single-parent households are handicapped in their ability to function in institutions that are fundamentally hierarchical, namely, education, the economy, and occupations.
This study extends the research on corporate financial fraud by developing a new perspective on the deterrence effects of vicarious punishments premised on social learning theory. We posit that firms vicariously learn about punishments from their peers by picking up modeling cues, environmental cues, and social cues in the inhibitive learning process, thus being deterred from committing future fraudulence. Using a matched sample of 604 observations of Chinese listed firms between 2002 and 2008, our findings show that an observing firm is deterred from committing fraud if the peers in its industry are caught and punished. We further find that such deterrence effects are subject to how the observing firm evaluates the possibility of being caught and the likelihood it will be punished the same way if it violates similar prohibitions. In particular, inhibitive learning effects are positively moderated by punishments of prominent firms and model-observer similarity but negatively attenuated by the development of the legal system. Our study sheds light on the corporate fraud literature by illuminating the indirect, inhibitive learning process from vicarious punishments and identifying the conditions for differential learning/deterrence outcomes of the observing firms.
A sample of 1123 young people in Hong Kong was interviewed., they responded to a number of statements concerning family norms. The data suggest that with regard to relationships between husband and wife, and parents and children, views are more consonant with the norms of the Western conjugal family than the traditional Chinese family. A pattern consonant with traditional norms is found concerning relationships with the older generation and a substantial minority support the notion of extended family living. It is argued that the coexistence of some traditional family norms and some norms typical of the conjugal family is functional in the Hong Kong context.
When a firm's chief executive officer is also the chairperson of its board, directors have opposing objectives. According to organization theory, such CEO duality establishes strong, unambiguous leadership. But according to agency theory, duality promotes CEO entrenchment by reducing board monitoring effectiveness. We developed a contingency framework to resolve these perspectives. Sampling three industries to enhance generalizability, we found that board vigilance was positively associated with CEO duality. Duality was less common, however, when CEOs had high informal power and when firm performance was high.
Data on intrafamily power relations, obtained by observing the interaction of husband-wife-child groups during a laboratory problem-solving session, are related to ratings of marital happiness. Families above the median in husband-to-wife power tend to be high in marital happiness, but no difference in marital happiness was found when families with low- and high-power wives were compared. High parent-to-child power was associated with high marital happiness, but high child-to-parent power was associated with low marital happiness. The findings are interpreted as reflecting stresses which occur as the power structure of the family changes from its present hierarchical form to a more equalitarian form. However, since low husband power was found to be associated with low problem-solving ability, part of the low happiness ratings of families with low-power husbands probably reflects dissatisfaction with the low competence rather than the low power of the husband.
There remains a good deal of uncertainty as to whether and under which governance conditions family firms, even large, publicly traded ones, are entrepreneurial. We shall argue that agency theory, behavioral agency perspectives, and the resource-based view all posit both positive and negative influences regarding entrepreneurship in family firms, while empirical studies, collectively, are no less ambiguous in their findings. We use each of the above theories to propose various governance distinctions that can reconcile these contradictions and suggest when family firms will be most and least entrepreneurial.
There has been growing recognition in recent years of the importance of corporate governance in ensuring sound financial reporting and deterring fraud. The audit serves as a monitoring device and is thus part of the corporate governance mosaic. The objective of this paper is to examine the impact of various corporate governance factors, such as the board of directors and the audit committee, on the audit process. Importantly, there is little professional guidance on how auditors should consider such factors when formulating an appropriate audit strategy, and there has been only one prior study on this issue (Cohen and Hanno 2000). Because there are no current specific auditing standards that relate to the effect of corporate governance on the audit process, we conducted a semi-structured interview with 36 auditors on current audit practices in considering corporate governance in the audit process. Reflecting on client experiences, auditors indicate a range of views with regard to the elements included in the rubric of “corporate governance”. Most significantly, auditors view management as the primary driver of corporate governance. The inclusion of top management in the “corporate governance mosaic” is inconsistent with agency theory's prescription of the board and other mechanisms serving as a means to independently oversee management's actions to protect stakeholders. Auditors consider corporate governance factors to be especially important in the client acceptance phase and in an international context. Further, despite the attention placed on the audit committee in the academic literature, in the business community, and by regulators in different countries (e.g., Canada, United States, Australia), several respondents indicated that their experiences with their clients suggest that audit committees are typically ineffective and lack sufficient power to be a strong governance mechanism. Implications for research and practice are presented.