Week 2 papers Flashcards
What is this paper an illustration of?
Dechow & Sloan (1991): Executive Incentives and the Horizon Problem
Congruence problem
What incentive do CEOs have in their last few years?
Dechow & Sloan (1991): Executive Incentives and the Horizon Problem
Incentive to boost short term earnings by rejecting positive NPV investments which develop IA (horizon problem)
What is the result for R&D expenditures in last years of CEO and what mitigates this?
Dechow & Sloan (1991): Executive Incentives and the Horizon Problem
R&D expenditures are reduced in last few years.
But this is mitigate by stock-price-based incentives (and relay process of CEO succession)
Why does CEO invest in R&D if he is rewarded on stock price, while he does not if rewarded on APM?
Dechow & Sloan (1991): Executive Incentives and the Horizon Problem
He can explain the investments to investors and the stock price can instantly absorb this information into the price.
Earnings-based incentives encourage executives to focus on short-term performance.
What difference exists in investments between CAPEX and advertising and why does this exist?
Dechow & Sloan (1991): Executive Incentives and the Horizon Problem
Investments in advertising are reduced, but not in CAPEX, since CAPEX is capitalized and advertising is expensed.
What are the 2 perspectives on accounting decentralization?
Indjejikian & Matejka (2012): Accounting Decentralization and Performance Evaluation of Business Unit Managers
- Decision-making perspective
- Performance evaluation perspective
What are the arguments for the decision-making perspective?
Indjejikian & Matejka (2012): Accounting Decentralization and Performance Evaluation of Business Unit Managers
Local information is a rational for operational decentralization, this implies that BU with more operational autonomy should have more accounting autonomy.
You want to match accounting with what is best for you BU, manager knows which accounting suits BU best.
What are the arguments for the performance evaluation perspective?
Indjejikian & Matejka (2012): Accounting Decentralization and Performance Evaluation of Business Unit Managers
Operational decentralization leads to agency problems that may be enhanced by accounting decentralization.
Operational decentralization –> control problems, we can fix this with FPM, but accounting decentralization means they can manipulate FPM.
Reason is that many PM are financial, so they can be manipulated with accounting decision rights.
What is the result regarding operational decentralization and accounting decentralization
Indjejikian & Matejka (2012): Accounting Decentralization and Performance Evaluation of Business Unit Managers
WIth more operational decentralization, there is also more accounting decentralization
What are the results regarding more FPM usage and accounting deceltralizatoin?
Indjejikian & Matejka (2012): Accounting Decentralization and Performance Evaluation of Business Unit Managers
FPM are used to mitigate control problem that comes from operational decentralization.
If more of these are FPM, firms are more careful with accounting decentralization, since the numbers can be manipulated more easily when they have accounting decentralization.
Why is it relevant that most customers are small businesses for granting loans?
Bouwens & Kroos (2019): The effect of delegation of decision rights and control: The case of lending decisions for small firms
There is only limited amounts of hard information available. This means soft information becomes more important in the decision making process.
What problem exists when AM must ask higher level for decision rights while he gets a bonus for loans sold? specifically while serving smaller companies
Bouwens & Kroos (2019): The effect of delegation of decision rights and control: The case of lending decisions for small firms
The AM knows soft information and his bonus is dependent on the amount of loans he sells (incentive to sell). If he needs approval, he transfers soft and hard information. But he might portray soft information more favorably. Hard information is harder to manipulate. Problem exists because soft information is often used to decide about the loan.
What 2 components determine riskiness of a loan?
Bouwens & Kroos (2019): The effect of delegation of decision rights and control: The case of lending decisions for small firms
- Internal rating of likelihood of default
- Amount of collateral
What are the results for loan rate and downgrade rate for loans approved by higher entity and why?
Bouwens & Kroos (2019): The effect of delegation of decision rights and control: The case of lending decisions for small firms
If approved higher, loan rate is lower (higher discount, in principle a positive), but is downgraded more often
If higher approval is needed, the AM can make the soft information more positive, meaning that loan looks more positive form higher perspective, meaning the rate is lower and the chance of downgrading higher.
What impact does audit or no audit have on loans?
Bouwens & Kroos (2019): The effect of delegation of decision rights and control: The case of lending decisions for small firms
The discount on loan rates is only given if there is no hard information. When hard information is available, this cannot be manipulated meaning the effect is not visible.
