Research

Topic areas:  Executive Compensation, Management Control Systems, Supply Chain Relationships

1. Sales-based CEO Incentive and Its Effect across the Supply Chain 

Winner of the 2024 AAA Competitive Manuscript Award
R&R at The Accounting Review

Presented at Arizona State University, Boston College, Chinese University of Hong Kong, GMARS, HARC, Harvard Business School, JMAR Online Rookie Camp (selected six rookies), Korea University, London School of Economics, MAS Meeting, Indiana University, Seoul National University, University of Iowa, University of British Columbia, University of Michigan, University of Texas Arlington, and Texas A&M University.  

"I shed light on the real effects of CEO sales incentives on the firm and its suppliers."

I examine the costs of using sales performance measures in CEO incentive contracts. A growing number of firms are evaluating and compensating their CEOs based on sales performance. However, since sales is a narrow metric of performance that does not incentivize expenditure control, these measures can motivate costly operational decisions that affect not only the firm, but also its suppliers. In this study, I show that sales performance measures in CEO annual bonus contracts promote inefficient inventory management that generate the “bullwhip effect,” whereby demand becomes more volatile as it travels up the supply chain. Instrumental variable tests using the firm’s network connections to other firms suggest that the results are not driven by omitted factors. Collectively, my findings illuminate the spillover effect of CEO incentive contracts on economically linked operations.

2. The Effect of Supplier Industry Competition on Pay-for-Performance Incentive Intensity (with M. Carter and K. Sedatole)

Published in the Journal of Accounting and Economics, 71(2-3), 101389 

Presented at Clemson University, FARS Research Roundtables, George Mason University, GMARS (Michigan State University), GRACE (Emory University), INSEAD, Notre Dame Accounting Research Conference, MAS Meeting, Monash University, Temple University, and University of Washington

"We find that firms structure CEO compensation contracts in a manner that leverages the benefits of supplier market competition."

Abstract: We examine how competition in supplier industries affects CEO incentive intensity in procuring firms. Using the Input-Output Accounts Data published by the Bureau of Economic Analysis, we compute a weighted supplier industry competition measure. We then predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to the effect of competition in the firm’s own industry documented in prior research and is robust to using alternative measures of supplier competition as well as 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 external suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).

3. Customer RPE: Using Customer Performance to Filter Noise Out of CEO Incentive Contracts (with M. Carter and K. Sedatole)

R&R at The Accounting Review

Developed from second-year summer paper at Emory University

Presented at AAA Annual Meeting, Arizona State University, CAAA Annual Meeting, Duke-UNC Fall Camp, Executive Compensation Corporate Governance Brownbag Series, FARS Meeting, HARC, Harvard Business School, KAIST Business School, MAS Meeting, University of Nebraska-Lincoln, and EIASM 

"We find that firms filter out demand shocks from firm performance to reduce the effect of idiosyncratic shocks to CEO compensation"

Abstract: Firms place negative incentive weights on industry peer performance in CEO contracting, known as relative performance evaluation (RPE), to improve incentive contract efficiency by filtering systematic shocks from CEO performance measurement. We test whether firms also filter from CEO performance measurement idiosyncratic shocks derived from a firm’s unique trading relationships. We document a negative incentive weight on customer performance in CEO incentive contracts – what we term “customer RPE” – incremental to RPE incentive weights on industry peer performance documented in prior research. The customer RPE effect is larger in magnitude for firms whose performance is more highly correlated with the performance of its customer base and those with lower ability to adapt to performance shocks (i.e., less operating flexibility). The effect is smaller for firms that have more collaborative customer relationships, consistent with firms avoiding an unintended negative consequence of incentivizing the CEO to take actions that might damage the long-term customer relationship. In contrast to peer firm RPE that serves to filter systematic shocks, our study is the first to provide evidence of the use of customer base performance to filter from CEO incentive contracts the effects of customer-driven idiosyncratic shocks.

4. The role of the human in the loop: The case of franchise agency costs in product assortment planning with predictive analytics
   (with E. Forker, I. Grabner, and K. Sedatole)

R&R at The Accounting Review
Received £30,000 CIMA research grant (topic: Contemporary Developments in Technology)

Presented at National University of Singapore and Emerging Management Scholar Symposium (UIUC)

"We find that predictive analytics act as a conduit of agency costs."

Abstract: Prior research documents the value of having a “human in the loop” to add context-specific information in decisions augmented by predictive analytics. We extend this research by examining the role that human intervention plays in the management of agency costs. We use proprietary data for product assortment planning decisions from a corporate automotive parts retailer with both company-owned and franchisee-owned stores. Building on research that documents franchisee moral hazard, we examine whether override decisions of model product stocking recommendations by a corporate analyst reflects franchisee preferences for lower inventory investment. We find that analyst override decisions have less incremental information content regarding a product’s future propensity to sell and result in a lower likelihood of stocking products for franchise stores as compared to company stores. In a subsample of franchise stores, we further show a lower propensity for analysts to stock product for stores owned by smaller franchisees with stronger preferences for reducing inventory investment and for stores for which the franchisee is better able to exert influence on the analyst. Importantly, in limited instances where franchisees personally override model recommendations, the extent of inventory underinvestment is even more pronounced, suggesting that analysts to some extent mitigate  franchisee agency costs. 

5. The Influence of Customer Innovation on Supplier Contract Adjustments (with C. Bae and J. Kim)

"We find that customer innovation acts as an infomrational signal for suppliers to adjust supply contracts."

Innovation plays a pivotal role in firm growth and competitiveness, but its impact on supplier behavior remains underexplored. This study explores how suppliers interpret customer innovation as a signal of potential growth and competitive threat, prompting them to adjust their supply contracts, particularly through the extension of trade credit. We find that suppliers are more likely to extend or increase trade credit in the years following customer innovation, especially when the suppliers’ technology does not overlap with that of the customer or when they have limited flexibility to adapt to customer innovation. Additionally, suppliers adjust their financial strategies and boost their own innovation efforts when customers innovate. These findings provide valuable insights into how customer innovation shapes supplier behavior and decision-making, highlighting trade credit as a strategic tool used to secure business relationships with customers possessing high growth potential.