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Internal control mechanisms are fundamental to organizational governance; particularly, to the agency relationship associated with decentralization of decision rights. Management accounting and organizational literatures provide conflicting predictions on the association between decentralization and internal controls, with some research arguing that internal controls be tightened to mitigate the risks associated with greater decentralization of decision rights while other work avers that tighter internal controls defeat the purposes of decentralization. In this chapter, we argue that managers choose these two organizational design variables jointly. Capitalizing on a unique database of control practices in the purchasing and payment process within the procurement function, this chapter examines the relationship between control tightness – a critical characteristic of internal controls – and decentralization. Using a simultaneous equation model, the study finds that decentralization and internal control design are endogenously determined. Tight control is negatively associated with the level of decentralization, while decentralization has a positive effect on the tightness of control. These results reconcile the apparently contradictory results relating these two variables. The chapter also finds that decentralization and tight control mechanisms operate both independently and synergistically to improve performance.

The information of pledging stocks for liquidity by controlling shareholders of publicly traded firms in Taiwan has been required to disclose since 1998. A common perception by market practitioners in Taiwan is that stock pledging by controlling shareholders is an indication of expropriation of firms. This study first examines the determinants of the tendency that controlling shareholders of firms in Taiwan pledge their stocks to financial institutions for liquidity and then evaluates how stock pledging by controlling shareholders affects their firms' accounting and financial performances. Determinants of firm attributes, market conditions, and corporate governance are identified. The tendency of stock pledging by controlling shareholders has a negative effect on accounting and financial performances. The negative effect on firm performance is reduced when the firm has a higher level of working capital. These findings indicate that stock pledging by controlling shareholders is an indication of weak corporate governance when the firm has lower liquidity. These findings may provide insights to the equity markets of the other countries in which public firms have more concentrated ownerships.

We examine the empirical relationship between direct equity agency costs measures and corporate governance control mechanisms to control equity agency costs. We measure the three direct agency cost proxies commonly used in the literature: the operating expense; asset turnover; and selling, general, and administrative (SGA) ratios. Internal corporate governance control mechanisms examined are inside ownership (IO), outside ownership concentration (OC), the size of the board of directors (BODs), and the composition of the BODs (proportion of nonexecutive (NE) directors and separation of chief executive officer (CEO) and board chair). The external corporate governance control mechanism examined is the size of bank debt (short-term debt). Univariate and multivariate tests reveal that the only statistically significant relationship between corporate governance control mechanisms and direct equity agency cost measures is the negative relationship between the proportion of IO and direct agency costs. The asset utilization ratio (asset turnover) ratio is the best proxy for direct equity agency costs and can be useful for event studies of announcement period excess returns.

Longitudinal regression analysis is conducted to clarify causal relations and control for unwanted influences from actor heterogeneity and state dependence on theoretically important coefficient estimates. Because strategic management contains theory on how firms differ and how firm actions are influenced by their current strategic position and recent experiences, consistency of theory and methodology often requires use of longitudinal methods. We describe the theoretical motivation for longitudinal methods and outline some common methods. Based on a survey of recent articles in strategic management, we argue that longitudinal methods are now used more frequently than before, but the use is still inconsistent and insufficiently justified by theoretical or empirical considerations. In particular, strategic management researchers should use dynamic models more often, and should test for the presence of actor effects, autocorrelation, and heteroscedasticity before applying corrections.

Using the NBER Shared Capitalism Database comprised of over 40,000 employee surveys from 14 firms, we investigate worker attitudes toward employee ownership, profit sharing, and variable pay. Specifically, our study uses detailed survey questions on preferences over profit sharing, forms of employee ownership like company stock and stock option ownership, as well as preferences over variable pay in general, to explore how preferences for these different types of output-contingent pay vary with worker risk aversion, residual control, and views of co-workers and management. Our key results show that, on average, workers want at least a part of their compensation to be performance-related, with stronger preferences for output-contingent pay schemes among workers who have lower levels of risk aversion, greater residual control over the work process, and greater trust of co-workers and management.

I reexamine the conflicting results in Frank, Lynch, and Rego (2009) and Lennox, Lisowsky, and Pittman (2013). Frank et al. (2009) conclude that firms can manage book income upward and taxable income downward in the same period, implying a positive relation between aggressive book and tax reporting. Lennox et al. (2013) conclude the relation is negative and aggressive book reporting informs users that aggressive tax reporting is less likely. I identify four key differences in the research designs across the two studies, including measures of aggressive book reporting, measures of aggressive tax reporting, sample time periods, and empirical models. I systematically examine whether each of these differences is responsible for the conflicting results by altering the key difference while holding other factors as constant as possible. I find the relation between aggressive book and tax reporting is driven by the measure of aggressive book reporting, as the relation is positive for some subsets of firms and negative for others. Firms accused of financial statement fraud have a negative relation while nonfraud firms exhibit a positive relation. Using discretionary accruals, I also look for, but do not find a “pivot point” in the relation between aggressive book and tax reporting. I provide a better understanding of the relation between aggressive book and tax reporting by identifying research design choices that are responsible for prior results. I show that measures of both discretionary accruals and financial statement fraud are necessary to gain a more complete picture of the relation between aggressive book and tax reporting.

This paper analyzes the age pay gap in Italy (22%), particularly as it is of interest in an aging society and as it may affect social cohesion. Instead of the traditional approach for model selection, we use a machine-learning approach (post double robust Least Absolute Shrinkage Operator [LASSO]). This approach allows us to reduce Omitted Variable Bias (OVB), given data restrictions, and to obtain a robust estimate of the conditional age pay gap. We then decompose the conditional gap and analyze the impact of four further potential sources of heterogeneity (workers', sectors', and occupations' permanent heterogeneity as well as sample selection bias). The results suggest that age discrimination in pay is only perceived but not real in Italy for both men and women.