Research seminars

Financialization and the institutional foundations of the new capitalism

Accounting & Management Control

Speaker: Bruce Carruthers
Northwestern University

20 October 2017 - HEC Paris - Room T004 - From 2:00 pm to 4:00 pm


One of key features of capitalism as a form of economic organization concerns its ability to change. Innovation often occurs by using old things in new ways, or by taking pre-existing elements and rearranging them into novel configurations [termed ‘conversion’ by Streeck and Thelen (2005, p. 26)]. Change can also happen when old activities are simply discontinued, or when new activities are added [what Mahoney and Thelen (2010, p. 16) call ‘layering’]. Capitalist innovation does not arise ex nihilo, nor does it involve wholesale rejection of the past. As even casual students of contemporary capitalism realize, much of today’s capitalism resembles the old-fashioned kind studied by nineteenth-century social theorists like Marx, Durkheim andWeber. Heavy industry still exists, tangible goods are still manufactured in factories using assembly line methods, commodities are sent around the world via rail or ship, people still make steel and dig coal and iron ore out of the ground, and so on. Nevertheless, a growing number of scholars have identified ‘financialization’ as a significant change: the growth in importance of financial markets and financial institutions, and the increasing involvement of economic actors in financial transactions (Krippner, 2011; Greenwood and Scharfstein, 2013; Philippon and Reshef, 2013). Such transactions consist of traditional activities like lending (e.g. bank loans and bonds) and investment (e.g. equities), but also newer ones involving derivatives and securitization. What is the significance of this change, and what undergirds it?
The markets that organize capitalism are based on a set of underlying institutional preconditions. What do such foundations consist of? Since markets are venues for economic exchange, the first precondition concerns the objects of exchange. What do buyers buy from sellers, and how are these objects constituted? This is not a matter of physical reality since market exchange involves rights over things or services, not necessarily the things or services themselves. But by virtue of private property rights, tangible and intangible objects are commodified and ownership rights over them can be freely transferred from one owner to another.
Second, markets depend on information to suppose an interdependent role structure: buyers and sellers. Markets cannot function without actors willing to act in both of these roles. If everyone wants to sell and no-one wants to buy, then market exchange will not occur. The same is true with only buyers, but no sellers. As Akerlof (1970) showed, asymmetries of information can cause markets to unravel. In his analysis, sellers possessed information that they could not credibly convey to buyers, but the more general problem is that both buyers and sellers seek information about the objects they transact. Too much uncertainty will curtail market exchange. Third, markets depend on regulation that is sufficient to suppose binding agreements. Many bilateral transactions unfold over time, they are not completed ‘on the spot’. For example, one party might receive goods and pay for them later, or someone might pay for goods, and receive them later. In modern markets, contracts are the vehicle typically used to make an agreement formally binding.1 Finally, market economies contain the possibility of failure by firms, who then face bankruptcy. Firms that are unprofitable will eventually close down and cease their activities: their assets will be distributed to their creditors and employees lose their jobs. Corporate bankruptcy or insolvency law provides the means to identify and extinguish failing firms.
Financialization, as I discuss below, involves the modification and rearticulation of these preconditions. Krippner (2011) emphasized the political origins of financialization, but here I explore its institutional basis, an aspect she does not treat. I have listed these preconditions as analytically separable, but in historical fact they were usually linked together. For example, the development of corporate lawenabled fictive individuals to become both owners of property and objects of property rights, where financial instruments functioned as the unit of ownership. A corporation was owned (by shareholders), and their ownership interests could be freely exchanged, but the corporation itself could also own property (for instance, other corporations). With the passage of general laws of incorporation and their modification at the end of the nineteenth century, corporations could own, buy, sell and enter into binding agreements. They could also fail, although limited liability protected the personal wealth of shareholders. In addition, these preconditions are often shaped through public regulation. Regulations may set restrictions on market entry (i.e. on who may act as a buyer or seller in a particular market), set prices or quality standards, standardize the contracts that govern exchange, mandate the provision of certain types of information by market actors or set the terms of market exit. The dynamism of contemporary capitalism stems, in part, from the emergence of new ways to satisfy these preconditions. Through institutional change, capitalism was able to financialize within an overarching framework of private property, information, regulation and failure, maintaining its identity as a distinct economic system. This complex combination of change and continuity unfolded as small variations were amplified into large and often unintended transformations. The outcomes were variably intended.

Star Analyst Voting and Recommendation Bias

Accounting & Management Control

Speaker: Qiang Cheng
Singapore Management University

18 October 2017 - HEC Paris - Room T004 - From 2:00 pm to 4:00 pm


Being voted as a star analyst increases an analyst’ compensation, reputation, and mobility. In this
paper, we examine financial analysts’ economic incentives arising from currying favor from
mutual funds in star analyst voting. Using the proprietary, detailed voting data from China, we
find that analysts issue more optimistically biased recommendations to the firms owned by the
voting funds. The extent of the recommendation bias increases with the relative weight of the
firm in the voting funds’ portfolios and the weight of the funds’ vote in the calculation of final
voting outcome, and decreases with the reputation of the brokerage houses that employ the
analysts. In addition, we find that the capital markets do not seem to recognize and discount
analysts’ recommendation bias arising from such voting connections. Collectively these findings
indicate that analysts issue biased recommendations to secure favourable votes from, or return
favour to mutual funds that vote for them.

“The quality of earnings and non-earnings information in stock returns, and their relative effect on the cost of equity”

Accounting & Management Control

Speaker: Eli Amir
Tel Aviv University

6 October 2017 - HEC Paris - Room T004 - From 2:00 pm to 4:00 pm


While prior literature shows that the quality of earnings information explains the variation in firms’ cost of equity, earnings information, after all, represents only a small part of firm specific, value-relevant, information. In addition, whereas different firms report earnings according to similar rules, their information environment on non-disclosure days is more heterogeneous. Using daily stock returns, we estimate the quality of information during earnings and non-earnings announcement days, and find that although the quality of information increases during earnings announcements, it explains less of the variation in expected returns than the quality of information on non-earnings days. Our findings suggest that the quality of earnings has but only a small effect on the cost of equity relative to the quality of information released on non-earnings days.

Joint seminar HEC/ESSEC - Localization of Global Accounting Practices: A comparative analysis of practice variation in response to institutional complexity

Accounting & Management Control

Speaker: Eksa Kilfoyle
University of Windsor, Ontario, Canada

20 June 2017 - Champerret - Amphi 461 - From 2:00 pm to 4:00 pm


We conduct a comparative analysis of the initial stages of implementation of global accounting and control practices in two member organizations of an international network. We analyze organizational responses to institutional pressures. We attend to nested institutional levels and show how institutional logics, enacted by executives in early stages of implementation, mediate variations in the localized accounting and control practices. Our study contributes to understanding how field level pressures shape practice variation beyond loose coupling and decoupling. We also highlight the importance of early stages of localization of accounting practices, given the path dependent nature of institutions. Executive team decisions and actions in response to field level pressures in the early stages of localization shape organizational responses to the introduction of global accounting practices. We find that localized accounting and control practices are institutional hybrids and we propose a process that explains the source of variations in these accounting hybrids.

R Share Repurchases and Accounting Conservatism

Accounting & Management Control

Speaker: Gerald Lobo
University of Houston

13 June 2017 - HEC Paris - room T004 - From 2:00 pm to 4:00 pm


The prior literature indicates that financial policy (e.g., payout policy) as well as accounting policy (e.g., conservatism) can be used to address incentive problems in firms. Similar to findings in Louis and Urcan (2014) who study cash dividends, we find that stock repurchases, an increasingly popular form of payout, are negatively related to conservatism, suggesting that these mechanisms are substitutes. Extending this analysis, and focusing on a particular manifestation of the incentive problem (managerial propensity to engage in overinvestment using free cash flows), we find that in firms with high levels of free cash flows, the negative relation between share repurchase and conservatism is stronger. By contrast, we find that the substitution effect is weaker when CEO tenure is higher, which confirms that more powerful CEOs have less incentives to solve the overinvestment problem. In an ancillary test, we show that the stock market reaction to share repurchases is increasing in conservatism, suggesting that the relation between conservatism and repurchases is complex (i.e., with multiple dimensions).

Re-forming healthcare: The role of accounting artifacts

Accounting & Management Control

Speaker: Jeff Everett
York University

2 June 2017 - HEC Paris - Room T004 - From 2:00 pm to 4:00 pm


This study examines the role accounting plays in major healthcare-policy-reform processes.
Focusing on a single hospital site in the African nation of Ghana, and starting from the practice theory of Pierre Bourdieu, the study analyzes how different forms, constructions, and classifications of accounting information—or accounting artifacts—shape policy regimes and facilitate particular patterns of activity and interaction. It further examines how these regimes and patterns, in conjunction with the embedded social memory or habitus of individual actors, in turn lead to the construction and use of new artifacts. The study also highlights how hospital staff and patients use various tactics to work with and around these artifacts, resulting in at times unintended consequences and the need to pursue new policy directions. In so doing, the study furthers our understanding of why policy-reform processes in the field of healthcare are so often sequential in nature.

Accounting of and for the World Multiple: The Sales and Operations Forecast and The Enactment of ’The Flow of The Product

Accounting & Management Control

Speaker: Jan Mouritsen
Copenhagen Business School

19 May 2017 - HEC Champerret - Amphi 471 - From 2:00 pm to 4:00 pm


This is a study of the role of accounting when the world is ontologically multiple. It analyses the construction of a Sales and Operational Planning (S&OP) forecast intended to coordinate laterally dependent processes of an inaccessible ‘underlying’ ‘flow of the product.’ This is important because much literature focuses on the constitutive dimensions of accounting whereby it deemphasises how the world may impact inscription work. Drawing on Latour’s two modes of existence – mode of substance and mode of reference – the paper analyses the development of a sales forecast intended to be mechanism from where all the firms’ – EuroTech – activities might be coordinated. It finds that not only accounting has a history but also the world and this emphasises the importance of so-called crossing points where accounting is imbued with new capability – not only inscription but also prescription, circumscription and conscription. During crossing points, accounting mechanism proliferate rather than substitute each other and they become engaged in articulating multiple ontologies; but only to a certain extent because coordination points towards an enduring problem of the frailty of multiply ontologies.

6th Interpretive Accounting Workshop

Accounting & Management Control

19 May 2017 - Champerret room 411 - From 9:00 am to 11:30 am


6th Interpretive Accounting Workshop

Accounting & Management Control

18 May 2017 - Champerret room 411 - From 2:00 pm to 6:00 pm


Joint seminar ESSEC/HEC - Direct Measures of Auditors’ Quantitative Materiality Judgments: Properties, Determinants and Consequences for Audit Characteristics and Financial Reporting Reliability

Accounting & Management Control

Speaker: Katherine Schipper
Duke University

4 May 2017 - CNIT Paris La Défense - Amphi 236 - From 11:00 am to 1:00 pm


For a large sample of audits carried out during 2005-2015 by eight large accounting
firms and inspected by the PCAOB, we provide evidence on the properties of auditors’
quantitative materiality judgments and the consequences of those judgments for both audit
characteristics (audit fees, audit hours, and detected misstatements) and financial reporting
outcomes (unreliable financial reports, proxied by restatements). We find that auditors’
quantitative materiality judgments do not appear to result only from applying conventional rulesof-
thumb, specifically, 5% of pre-tax income, but instead are associated with qualitative factors
suggested by authoritative guidance and with size-related financial statement outcomes (income,
revenues and assets); weights placed by auditors on these outcomes vary with client
characteristics such as profitability. We construct a materiality slack measure that makes
individual audit-firm-specific materiality judgments comparable with regard to whether they are
looser or tighter within boundaries specified by non-authoritative guidance in audit-firm policies.
We find that materiality slack (that is, relatively looser materiality) is associated with fewer audit
hours, lower audit fees, and a lower amount of detected misstatements. After controlling for
other factors including decisions to waive audit adjustments, we find evidence that looser
materiality judgments are associated with greater incidences of restatements.

Buying Products from Whom You Know: Personal Connections and Information Asymmetry in Supply Chain Relationships

Accounting & Management Control

Speaker: Ron Shalev
NYU Stern School of Business

28 April 2017 - HEC Paris- Room T015 - From 2:00 pm to 4:00 pm


This study investigates whether the ability of executives to mitigate information asymmetry via interpersonal connections can affect the formation and the contractual terms of customer-supplier relations. We find that both educational and past work-based personal connections increase the likelihood of a potential supplier (hereinafter: vendor) becoming an actual supplier (hereinafter: supplier). The magnitude of the effect varies across management ranks and positions. Personal connections grow in importance when information asymmetry between the vendor and customer increases and thus affect both the choice of suppliers and contractual terms. Finally, transacting with a personally connected supplier can mitigate supply chain interruptions and improve customer performance.

Determinants and Consequences of Presentation Format: The Case of ETR Reconciliations

Accounting & Management Control

Speaker: Sundaresh Ramnath
University of Miami

21 April 2017 - HEC Paris - room T004 - From 2:00 pm to 4:00 pm


SEC Regulation S-X requires companies to reconcile deviations between their actual tax expense and their expected tax expense under federal statutory tax rates (effective tax rate (ETR) reconciliation). This regulation permits companies to choose between a dollar or percentage format for the ETR reconciliation. In our sample, roughly half the firms choose one of the two formats. We investigate the causes and consequences of this disclosure decision. We find, consistent with a political cost argument that firms with low (high) ETRs, through their choice of presentation format, tend to highlight the dollar (percentage) amount of the tax expense. We also find that users such as analysts seem to find the percentage format easier to use and tend to make smaller errors in their ETR forecasts when firms present their ETR reconciliation in the percentage format. Moreover, analysts’ ETR forecast dispersion is higher when companies present reconciliation in the dollar format, consistent with analysts’ comfort (or lack thereof) when information is presented in an easily usable (less straightforward) format.

Political rationalities of calculation: articulating sovereignty and governmentality

Accounting & Management Control

Speaker: Rita Samiolo
University of Innsbruck

7 April 2017 - HEC Paris - room T004 - From 2:00 pm to 4:00 pm


Drawing on studies of “governmentality” and “world society theory”, this paper revisits the theme of
calculation in government. Through the particular case of Italy and of a controversy which has divided the Italian state for decades – the safeguard of the city of Venice – it examines the relationship between specific notions of the state, ways of questioning and problematising it, and the use of numbers and technologies of calculation. More specifically, this paper traces the discursive conditions within which a calculative tools such as environmental impact assessment (EIA) and cost-benefit analysis (CBA) came to be seen as indispensable in order to decide upon the flood protection scheme for Venice. Enrolled in the effort to “rationalize” and “democratize” the state and to reform it “from the outside” by means of international expertise, EIA and CBA became the object of a fierce scientific and political controversy which was ultimately not resolved on the grounds of calculation. The paper shows how a specific way of reasoning about the state and its shortcomings – well established in the Italian political science literature and reflected in the specific debates revolving around the case of Venice – defeated the optimisation logic which the EIA and CBA were supposed to bring about. The paper concludes that calculation, seen as a core feature of contemporary governmentality, can find its limits at the intersection of different governmental strategies or “modes” of governmentality, whose historical roots may be found in what Foucault discussed as “the state of diplomacy” and “the state of police”.

5th annual HEC/ESSEC joint research workshop organized by HEC Paris

Accounting & Management Control

17 March 2017 - HEC Champerret - Room 293 - From 9:30 am to 4:00 pm


Capitalization: A Cultural Guide

Accounting & Management Control

Speaker: Fabian Muniesa
Mines Paris Tech

3 March 2017 - HEC Paris - room T004 - From 2:00 am to 4:00 am


What does it mean to turn something into capital? What does considering things as assets entail? What does the prevalence of an investor’s viewpoint require? What is this culture of valuation that asks that we capitalize on everything? How can we make sense of the traits, necessities and upshots of this pervasive cultural condition?

This book takes the reader to an ethnographic stroll down the trail of capitalization. Start-up companies, research centers, consulting firms, state enterprises, investment banks, public administrations: the territory can certainly prove strange and disorienting at first sight, with its blurred boundaries between private appropriation and public interest, economic sanity and moral breakdown, the literal and the metaphorical, the practical and the ideological. The traveler certainly requires a resolutely pragmatist attitude, and a taste for the meanders of signification. But in all the sites in which we set foot in this inquiry we recognize a recurring semiotic complex: a scenario of valuation in which things signify by virtue of their capacity to
become assets in the eye of an imagined investor.

A ground-breaking anthropological investigation on the culture of contemporary capitalism, this work directs attention to the largely unexplored problem of capitalization and offers a critical resource for current debates on neoliberalism and financialization.


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