The immunization effect of internal control system transparency following a supplier’s violation of buyer trust
2024 Journal of Management Accounting ResearchCianci, A., B. Reichert, K. L. Sedatole, and G. Tsakumis
In this study, we show that a supplier’s internal controls (IC) that lead to either falling short of or to exceeding buyer expectations play an important role in the trust a buyer has in its supplier. In a 12-round repeated trust game, we examine the impact of supplier ICs and the transparency of those ICs to the buyer on buyer trusting behavior across three phases of the buyer-supplier relationship: (1) trust formation, (2) trust violation, and (3) trust repair. We find that, while a supplier’s trust violation reduces buyer trusting behavior, the least amount of damage to trusting behavior occurs for suppliers whose ICs led to supplier actions that fell marginally short of buyer expectations prior to the violation and when the IC was transparent to the buyer. We refer to this as the IC transparency “immunization effect.” We show suppliers can benefit from making IC choices known to partners.
Making the most of supplier industry competition through incentive contracting
2021 Journal of Accounting and Economics 71 (2-3).Carter, M. E., J. Choi, and K. L. Sedatole
We examine how supplier industry competition affects CEO incentive intensity in procuring firms. Using Bureau of Economic Analysis data to compute a weighted supplier industry competition measure, we predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to that of the firm's own industry competition previously documented and is robust to alternative measures of supplier competition and to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm's benefit. Our findings are economically important as suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).
The folly of forecasting: The effects of a disaggregated demand forecasting system on forecast error, forecast positive bias, and inventory levels
2021 The Accounting Review 96 (2): 127–152Bruggen, A., I. Grabner, and K. L. Sedatole
Periodic demand forecasts are the primary planning and coordination mechanism within organizations. Because most demand forecasts incorporate human judgment, they are subject to both unintentional error and intentional opportunistic bias. We examine whether a disaggregation of the forecast into various sources of demand reduces forecast error and bias. Using proprietary data from a manufacturing organization, we find that absolute demand forecast error declines following the implementation of a disaggregated forecast system. We also find a favorable effect of forecast disaggregation on finished goods inventory without a corresponding increase in costly production plan changes. We further document a decline in positive forecast bias, except for products whose production is limited owing to scarce production resources. This implies that disaggregation alone is not sufficient to overcome heightened incentives of self-interested sales managers to positively bias the forecast for the very products that an organization would like to avoid tying up in inventory.
When one size does not fit all: Mitigating heterogeneous compensation risk through subjective evaluations
2020 Management Accounting Research 49: 1-12Anderson, S. W., H. Dekker, K. L. Sedatole, and E. Wiersma
Winner of the Management Accounting Research 2020 David Solomons Prize.
Firms typically use a ‘one-size-fits-all’ (OSFA) compensation contract that specifies a common formulaic relation between performance and compensation (i.e., a performance bonus) for non-executive managers in similar jobs. However, a contract that is appropriate on average, may be suboptimal for individual managers if heterogeneity in the operating environment creates varying compensation risk. We use field data from a retail firm that introduced an OSFA bonus compensation plan for its store managers. The common bonus formula is based on a weighted sum of objective measures of performance and a subjective rating made by supervisors. The firm intended the supervisors’ discretionary subjective rating to evaluate performance on dimensions that are difficult to measure (e.g., store appearance). We test and find that supervisors give uniformly higher subjective ratings to managers whose objective measure of sales performance is measured with greater noise, and to managers who face higher performance target difficulty, the latter assessed both prior to (ex ante) and subsequent to (ex post) the evaluation period. These results obtain after controlling for manager ability and performance, and for alternative mechanisms to mitigate differences in compensation risk (e.g., salary changes, sales target changes, and bonus adjustments). The evidence suggests that supervisors use discretion in subjective ratings to provide manager-specific risk premiums for non-executive managers who are subject to an OSFA contract.
The role of calibration committees in subjective performance evaluation systems
2019 Management Science 65 (4): 1562-1585Demere, W., Sedatole, K. L. and A. Woods
Winner of the 2020 AAA Notable Contributions to Management Accounting Literature Award.
Featured in Harvard Business Review, November-December 2018.
We provide the first empirical evidence of the role that calibration committees play in subjective performance evaluation systems. Using proprietary data from a large multinational organization, we begin by showing that calibration committees adjust ratings sparingly (i.e., 25% adjustment rate), but when they do, downward adjustments are significantly more frequent and of greater magnitude than upward adjustments. Calibration committees tend to downward (upward) adjust ratings of supervisors who give higher (lower) than average initial ratings. Taken together, calibration committees improve the consistency of ratings across supervisors and mitigate leniency bias, but exacerbate centrality bias. We also show that calibration committees facilitate the appropriate allocation of decision rights by deferring rating decisions to supervisors who possess a relatively greater information advantage. That is, calibration committees are less likely to adjust the rating of a subordinate who is further removed from committee members in the organizational hierarchy. Finally, we show that calibration committees promote supervisor learning about organizational performance rating expectations through calibration adjustments. This study contributes to the literature on performance evaluation by providing new insights regarding the organizational dynamics of subjective performance evaluation systems when decision rights span hierarchical levels of the organization.
The implicit incentive effects of horizontal monitoring and team member dependence on individual performance
2016 Contemporary Accounting Research 33 (3): 889–919Sedatole, K. L., A. Swaney, and A. Woods
This study examines the implicit incentive effects of horizontal monitoring and team member dependence for individuals working in teams but facing explicit incentives based solely on measures of individual performance. We combine proprietary performance data with survey data for 133 internal auditors. We show that the social influences of relatively high levels of both horizontal monitoring and team member dependence provide implicit incentives that motivate individual performance, making the provision of team rewards unnecessary to ensure individual and team productivity. We conclude that horizontal monitoring and team member dependence are complementary control mechanisms whose effectiveness helps explain the observed practice of organizing work into teams without explicit team based rewards.
Do the incentive effects of relative performance measurement vary with the ex ante probability of promotion?
2016 Management Accounting Research 30: 18-31.Demere, W., Krishnan, R., K. L. Sedatole, and A. Woods
This study examines performance effects arising from the use of relative performance measurement (RPM) for promotion decisions in the organizational labor market. We use proprietary archival and survey data from the internal audit department of a large organization to document that the use of RPM positively interacts with the ex ante probability of promotion to influence performance. Thus, our study shows that while RPM may benefit employees by reducing uncertainty in incentive compensation as predicted by theory, the incremental performance benefits derived from the use of RPM as a promotion mechanism depend on the employee’s promotion prospects. Specifically, we find greater (lower) performance benefits associated with the use of RPM when an employee’s probability of promotion is greater (lower). Our findings suggest that RPM may be more effective in firms where there are opportunities for promotion at each organizational level.
Do extant management control frameworks fit the alliance setting? A descriptive analysis
2015 Industrial Marketing Management, special issue on Accounting and Marketing Perspectives of Value Creation in Inter-firm Collaboration in Industrial Markets 46: 36–53Anderson, S. W., M. H. Christ, H. C. Dekker, and K. L. Sedatole
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The use of management controls to mitigate risk in strategic alliances: Field and survey evidence
2014 Journal of Management Accounting Research 26 (1): 1-32Anderson, S. W., M. H. Christ, H. C. Dekker, and K. L. Sedatole
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The use of contract adjustments to lengthen the CEO horizon in the presence of internal and external monitoring
2013 Journal of Management Accounting Research 25 (1): 199-229Dikolli, S. S., S. L. Kulp, and K. L. Sedatole
Winner of the 2014 Journal of Management Accounting Research Best Paper Award.
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Evidence on the cost hierarchy: The association between resource consumption and production activities
2013 Journal of Management Accounting Research 25 (1): 119-141Anderson, S. W., and K. L. Sedatole
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Sticks and carrots: An experimental investigation of contract frame and effort in agency relationships
2012 The Accounting Review 87 (6): 1913-1938Christ, M. H., K. L. Sedatole, and K. L. Towry
Presented at the 2012 Experimental Economics, Accounting and Society: A Conference in Memory of John Dickhaut, Economic Science Institute, Chapman University.
Winner of the 2010 AAA MAS Research Conference Outstanding Paper Award.
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The use of management control mechanisms to mitigate moral hazard in the decision to outsource
2012 Journal of Accounting Research 50 (2): 553-592Sedatole, K. L., D. Vrettos, and S. K. Widener
Presented at the 2011 Journal of Accounting Research Conference.
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The use of collaborative interfirm contracts in the presence of task and demand uncertainty
2011 Contemporary Accounting Research 28 (4): 1397–1422Krishnan, R., F. Miller, and K. L. Sedatole
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Integrated information systems and alliance partner trust
2011 Contemporary Accounting Research 28 (3): 1018-45Nicolaou, A., K. L. Sedatole, and N. Lankton, N
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Employees’ subjective valuations of their stock options: Evidence on the distribution of valuations and the use of simple anchors
2011 Contemporary Accounting Research 28 (3): 747–93Farrell, A., S. Krische, and K. L. Sedatole
Winner of the 2016 AAA MAS Impact on Management Accounting Practice Award.
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Drivers and consequences of short-term production decisions: Evidence from the auto industry
2011 Contemporary Accounting Research 28 (1):83-123Bruggen, A., R. Krishnan, and K. L. Sedatole
Winner of the 2012 AAA MAS Impact on Management Accounting Practice Award
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An empirical examination of goals and performance-to-goal following the introduction of an incentive bonus plan with participative goal-setting
2010 Management Science 56 (1): 90-109Anderson, S. W., H. C. Dekker, and K. L. Sedatole
Winner of the 2012 AAA Notable Contributions to Management Accounting Literature Award.
Winner of the 2006 AAA MAS Research Conference Outstanding Paper Award.
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Transient institutional ownership and CEO contracting
2009 The Accounting Review 84 (3): 737-770Dikolli, S. S., S. L. Kulp, and K. L. Sedatole
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Improvements in the information content of non-financial forward-looking performance measures: A taxonomy and application
2007 Journal of Management Accounting Research 19: 71-104Dikolli, S. S. and K. L. Sedatole
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Measuring customer relationship value: The role of switching cost
2007 Contemporary Accounting Research 24 (1): 93-132Dikolli, S. S., W. R. Kinney, and K. L. Sedatole
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The effect of control systems on trust and cooperation in collaborative environments
2005 The Accounting Review 80 (2): 477-500Coletti, A. L., K. L. Sedatole, and K. L. Towry
Winner of the 2009 AAA Notable Contributions to Management Accounting Literature Award
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Relating e-satisfaction to behavioral outcomes: An empirical study
2004 Journal of Services Marketing 18 (4): 290-302Bansal, H. S., S. S. Dikolli, S. S., G. McDougall, and K. L. Sedatole
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Management accounting for the extended enterprise: Performance management for strategic alliances and networked partners
2003 In Management Accounting in the Digital Economy, A. Bhimani, Ed., London: Oxford University PressAnderson, S. W. and K. L. Sedatole
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The effect of measurement alternatives on a non-financial quality measure’s forward-looking properties
2003 The Accounting Review 78 (2): 555-580Sedatole, K. L.
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Sourcing parts of complex products: Evidence on transactions costs, high-powered incentives and ex-post opportunism
2000 Accounting, Organizations & Society 25 (8): 723-749Anderson, S. W., D. Glenn, and K. L. Sedatole
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Designing quality into products: The use of accounting data in new product development
1998 Accounting Horizons 12 (3): 213-233Anderson, S. W. and K. L. Sedatole
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