Working papers

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Departments: Accounting & Management Control, GREGHEC (CNRS)

Evidence suggests society still does not view whistleblowers as wholly legitimate – despite legal protections now offered in some jurisdictions, such as the United States. Drawing on a discourse analysis, (i.e., an examination of statements), we investigate the well-publicized stories of seven whistleblowers from 69 sources, including books, first- and second-hand interviews, websites and videos. Our focus is to examine how whistleblower discourses can build legitimacy by more tightly defining the whistleblower role and demonstrating its alignment with social norms. Using whistleblower self-narratives, we identify four narrative patterns: (1) Trigger(s): the event(s) leading to whistleblowing; (2) Personality traits: whistleblower’s morality, resourcefulness, and determination; (3) Constraints: barriers requiring regulatory and organizational change; and (4) Consequences: the longer-term positive impact of the whistleblowing act. These patterns rely on symbolic, analogical, and metaphorical framing to allow others to better understand the role of whistleblowers and enlist their support. Exploring a data-set of 1,621 press articles, we find indications that these narrative patterns resonate in the media – which provide a form of support and may be instrumental in legitimizing the whistleblower role. Grounded on these results, we develop a legitimacy construction model of the whistleblower role, i.e., a representation of how role legitimacy is produced and sustained. From this model, we identify a number of important areas for future research.

Keywords: Whistleblowing, Fraud Detection, Role Definition, Discourse Analysis, Legitimacy, Securities and Exchange Commission (SEC), Sarbanes-Oxley Act (SOX)

Departments: Accounting & Management Control, GREGHEC (CNRS)

The objective of this study is to investigate how non-financial reporting (NFR) is defined and has expanded in recent years. First, we explore the heterogeneity in definitions and current NFR practices. We find a lack of convergence between regulators and standard-setters, as well as leading sustainable firms. Second, we examine the changes in the extent and type of NFR reported by firms over the period 2006-2016. Based on a sample of firms in South Africa, a leading country in NFR, we document a significant increase in the amount of NFR, particularly between 2006 and 2011. This change appears to be driven by new environmental, human capital, performance and strategic disclosures. The relative importance of financial information in corporate reporting decreased substantially over the same period. Third, we compare reporting practices for corporate social responsibility (CSR)/sustainability information between constituents of the S&P 500 index and the EuroStoxx 600 index. We find that overall, the percentage of firms issuing CSR/sustainability reports increased dramatically between 2002 and 2015 for both stock indices. Constituents of the U.S. stock index and growth firms are less likely to report CSR/sustainability information, whereas firms in the European stock index in environmentally sensitive industries, have high capital intensity and good CSR performance, are larger with better financial performance, are more likely to report CSR/sustainability information.

Keywords: Non-Financial Reporting (NFR), Non-Financial Information (NFI), Integrated Reporting, Corporate Social Responsibility (CSR) Reporting, Sustainability Reporting, Environmental Reporting, Social Reporting

Departments: Accounting & Management Control

his is a study of analysts’ use of accounting information for valuation purposes in a venture capital setting. This setting is characterized in terms of the distinctive scouting and coaching work of venture capital funders, and the unproven and incomplete nature of the ventures and entrepreneurs, which seek funding to scale operations, pivot into new markets, internationalize, or undertake some other kind of fundamental change. Based on interviews with entrepreneurs (project-makers) and venture funders (analysts), a four phase model of valuation is proposed. The model illuminates that, in contrast with common assumptions in the existing literature, accounting is mobilized neither to reveal truth nor constitute knowledge about the objects of investment, but to promise and to care. This paper articulates these two concepts in the context of accounting. Promising is shown to be a means not to implement a predesigned business plan and a budgeted set of activities but to commit to a new and unclear future and agree high and sometimes unrealistic expectations. Caring is shown not to be a means to predict a final fate for the organization, but to give and take, interact and sometimes discipline in order to determine what is necessary to preserve and possible to change. Understanding that what is valued is not what exists but what is possible to create helps to resolve puzzles about accounting’s uncertain and ambiguous status and significance in the entrepreneurial economy. It also and more generally illustrates how accounting operates in relation to an unknowable object and future: not as a means to know or reveal but to write and rewrite a daring and ambitious narrative in which the protagonists (here the project-maker and venture) become something else (a manager and an organization).

Keywords: Analysts, Valuation, Qualitative Research, Venture Capital

Departments: Accounting & Management Control, GREGHEC (CNRS)

In this paper, we re-examine the notion that socially-responsible behavior by firms will lead to increased financial performance. By identifying the underlying processes, institutional settings and actors involved, we present a framework that is more attentive to the multiplicity and conditionality of the mechanisms operating in the often-tenuous connection between firms’ social behavior and financial performance. Building and expanding upon existing analyses of the CSP-CFP linkage, our model helps explain the mixed results from a wide range of empirical studies which examine this link. It also provides a novel theoretical account to help guide future research that is more attentive to conditionalities and contextual contingencies.

Keywords: Business Ethics, Corporate Social Performance, Corporate Financial Performance, Corporate Social Responsibility, Mechanisms

Departments: Accounting & Management Control, GREGHEC (CNRS)

This paper has three objectives: (1) To introduce a theoretical solution to the issue of non-additivity between assets in place, relying on an accounting-based valuation approach; (2) To explain how such an approach can be implemented empirically by measuring synergies between assets; (3) To present the properties of this non-additive valuation technique. We use Choquet capacities, i.e., non-additive aggregation operators, to measure the interactions between assets and apply our methodology to a sample of U.S. firms from the Capital Goods industry. To operationalize our approach we examine the relationships between synergies – captured by Choquet capacities – and the market-to-book ratio (proxying for growth options), and show how interactions between assets are consistently linked to a firm’s market-to-book ratio. We also measure firm-specific productive efficiency relative to the industry and firm size. For large firms, efficiency, as defined by our approach, is positively associated with higher future operating cash flows. For small firms, efficiency is positively associated with higher future sales growth. We document that the non-additive approach appears to be better to identify expected relationships between efficiency and future performance than a simpler approach based on the market-to-book ratio.

Keywords: Goodwill, Non-additive accounting-based valuation, Synergies, Choquet capacities, Growth options, Productive efficiency

Departments: Accounting & Management Control, GREGHEC (CNRS)

This paper investigates the link between one managerial characteristic, the degree of risk aversion, and accounting conservatism. Two models are analyzed, one where the degree of conservatism is chosen by the principal (Board) and accounting information is used for stewardship, and a second where the principal delegates the choice of the degree of conservatism to the manager and accounting information is primarily used for investment efficiency. We show in the first model that higher risk aversion reduces the demand for conservatism from a stewardship point of view. In the second model, we show that delegation is an optimal way for the principal of committing to conservative reporting. Hiring a more risk-averse manager lowers the cost of implementing this conservative reporting. The two models provide opposite predictions for the association between managerial risk aversion and the degree of conservatism. Empirical evidence favors the second model’s prediction. The paper suggests that managers with specific characteristics and incentive contracts might be endogenously chosen by the firm to implement an ex-ante optimal degree of conservatism.

Keywords: Accounting Conservatism, Risk Aversion, Limited Liability, Reporting Bias, Principal-Agent Theory, Stewardship, Investment Efficiency

Departments: Accounting & Management Control

Exit theory predicts a governance role of non-managerial blockholders’ exit threats; but this role could be ineffective if the managers’ potential private benefits exceed their loss in stock-price declines caused by non-managerial blockholders’ exit. We test this prediction using the Split-Share Structure Reform (SSSR) in China, which provided a large, exogenous, and permanent shock to the cost for non-managerial blockholders to exit. Using a difference-in-differences design combined with propensity-score matching, we find that firms whose non-managerial blockholders experience an increase in exit threat have a greater improvement in performance than those whose non-managerial blockholders experience no increase. The improvement is as much as 37.2% of the average pre-SSSR treatment sample operating performance. Moreover, the governance effect of exit threats becomes ineffective in the group of firms with the highest concern for private benefits of control. Finally, a battery of theory-motivated tests show that the documented effects are unlikely explained by non-managerial blockholder intervention or some well-known intended effects of SSSR.

Keywords: Exit-Threat Theory, Private Benefits of Control, Liquidity, China, Split-Share Structure Reform, Operating Performance, Quasi-Experiment

Departments: Accounting & Management Control

This study examines how a firm’s business relationship with the U.S. government, in particular, sales to the government, impacts its loan contract terms and how the effect is different from that of major corporate customers. We find that firms with major government customers have a lower number of covenants and are less likely to have performance pricing provisions in their loan contracts than other firms, whereas major corporate customers do not have such impacts. We do not find evidence that major government customers affect the supplier firm’s loan spread, security, or maturity. We conjecture that lenders benefit from the strict monitoring activities of the government customer and reduce the use of covenants and performance pricing in loan contracts when the borrowing firm has a government customer.

Keywords: Government Customers, Loan Contract Terms

Departments: Accounting & Management Control, GREGHEC (CNRS)

Prior research provides mixed evidence on whether the transition to IAS/IFRS deters or contributes to greater earnings management (earnings smoothing). The dominant explanation for the conflicting results is self-selection. Early voluntary adopters had incentives to increase the transparency of their reporting in order to attract outside capital, and, therefore, earnings management (smoothing) went down after adoption, while those firms that waited until IFRS adoption became mandatory in EU countries lacked incentives for transparent reporting leading to increases in earnings management (smoothing) after IFRS adoption. We argue that IAS/IFRS standards changed substantially from the early voluntary adoption period to the mandatory adoption year (2005). Compared to earlier IAS/IFRS standards and many countries’ domestic GAAP standards, we maintain that the IFRS standards that went into effect in 2005 provide greater flexibility of accounting choices because of vague criteria, overt and covert options, and subjective estimates that are allowed under these principle-based standards. We argue that this greater flexibility coupled with the lack of clear guidance on how to implement these new standards has led to greater earnings management (smoothing). Consistent with this view, we find an increase in earnings management (smoothing) from pre-2005 to post-2005 for Early Adopters and Late Adopters in countries that allowed early IAS/IFRS adoption, and for Mandatory Adopters in countries that did not allow early IFRS adoption. Our major findings hold after eliminating firms more likely to have mechanically-induced increases in earnings smoothing properties as a result of IFRS adoption and across countries with and without concurrent improvements in enforcement of accounting standards. We also find that firms from countries with less (more) local GAAP flexibility exhibit greater (less) evidence of increases in earnings smoothing following mandatory adoption of IFRS standards in 2005. Collectively, our results suggest that the increased flexibility of new IAS/IFRS standards and lack of clear guidance in implementing these standards are major factors that explain earnings management (smoothing) changes around IFRS adoption.

Keywords: IFRS, earnings management, smoothing

Departments: Accounting & Management Control, GREGHEC (CNRS)

We present new evidence on the violation of priority of claims in bankruptcy and recovery rates for secured creditors, unsecured creditors, equity holders using a sample of firms that filed for Chapter 11 bankruptcy between 1993 and 2004. Our study reveals a number of new insights: First, we find a significant reduction in the violations of priority of claims compared to research on prior periods with equity holders appearing to have lost their ability to extract concessions in violation to priority of claims. Second, the results are consistent with the hypothesis that unsecured creditors accept a violation to priority of their claims in order to obtain a faster resolution. Third, the results suggest that secured creditors are less likely, and unsecured creditors are more likely, to experience a violation to priority of their claims when secured creditors exercise increased control over the debtor (as proxied by debtor in possession financing). Finally, violations to secured creditors priority of claims are more likely when filings occur in Delaware and the Southern District of New York than elsewhere.

Keywords: Bankruptcy, Priority of Claims, Chapter 11, APR Violations, Debtor-in-possession financing, Delaware

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