Research Paper Series

  • Title
  • Author(s)


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, GREGHEC (CNRS)

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


Departments: Accounting & Management Control, GREGHEC (CNRS)

The observed smoothing of earnings (i.e. negative contemporaneous correlation between accruals and cash flows) is the joint product of the role of accruals in smoothing out transitory fluctuations in operating cash flows (noise reduction role) and the role of accruals in providing timely gain and loss recognition (contracting role). These two roles of accruals have opposite effects on earnings smoothing properties. We demonstrate that failing to control for changes in timely gain and loss recognition as firms shift to IFRS can lead to erroneous inferences regarding the effects of IFRS adoption on earnings smoothing, and consequently on researcher’ conclusions about how IFRS adoption has affected accounting quality. Our results are consistent with IFRS adoption resulting in a change in the contracting role rather than the noise reduction role of accruals. A decrease in timely loss recognition, an increase in timely gain recognition, and a net decrease in asymmetric timely loss recognition are what drives the change in observed smoothing of earnings.

Keywords: Earnings smoothing, IFRS, Timely gain and loss recognition


Departments: Accounting & Management Control, GREGHEC (CNRS)

While increases in earnings are common, we identify a setting in which they signal a separating equilibrium. Firms that “defy gravity’ (DG) by reporting increases in earnings despite experiencing a decline in sales from continuing operations, signal their viability as a going- concern, and achieve separation from other firms with decreasing sales. We find that DG signals higher future earnings, cash flows, and one-year-ahead stock returns. More importantly, we find that the DG signal is more credible when more costly to produce: DG firms subsequently perform better when (1) they are ex ante in poorer financial health, (2) the magnitude of the earnings shortfall is larger (they have higher downward cost rigidity), (3) they pass up the opportunity of taking a ‘big bath’ in times of crisis (years where declines in earnings can be blamed on economy-wide shocks), and (4) when they have less flexibility to manage earnings upwards. Finally, because some degree of pooling remains within DG firms, we show that the DG signal is more credible when it is produced contemporaneously with abnormal CEO buying. To our knowledge, this study is the first to provide empirical evidence that earnings increases that are more costly to achieve are more credible signals of future performance.

Keywords: Signaling, Costliness, Credibility, Earnings


Departments: Strategy & Business Policy, GREGHEC (CNRS), Accounting & Management Control

We study the impact of a new nationally advertised six-month intensive training program to encourage social entrepreneurship among youth. Program costs were on the order of 12,000 euros per participant. We conduct a randomized field experiment where 50 applicants were randomly allocated to the program and 50 similar applicants were rejected. We measure social entrepreneurial skills, intentions, aspirations and actions, progress towards launching a venture, and some non-cognitive skills pre and post treatment. Treatment effects were marginal on ventures’ progression six months after program completion. We find no treatment effects on non-cognitive skills, intentions or aspirations. Those that had made more progress on their venture prior to the start of the program were more likely to make progress afterwards, irrespective of whether they joined the program or not. Training people to become entrepreneurs seems to be difficult and costly.

Keywords: Field experiment, Social entrepreneurship, Entrepreneurship


JavaScriptSettings