Research

Key topic areas:  Management Control Systems, Executive Compensation, Predictive Analytics, Supply Chain Relationships

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

"Sales-based incentives can encourage operational decisions that increase inventory volatility and amplify the bullwhip 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.  

Abstract: 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)

"Greater competition among a firm’s suppliers enables higher pay-for-performance incentives, reflecting changes in risk and profit margins created by upstream market conditions." 

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

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)

"Firms adjust CEO pay not only for industry-wide shocks, but also for performance shocks driven by their own customers, effectively insulating managers from factors outside their control."

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 

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)

"Human judgment can help tailor analytics to local conditions, but it can be a conduit for agency costs.
Centralized oversight and well-designed incentives help ensure that analytics-driven systems deliver their intended benefits."

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)

Abstract: Research highlights the value of a “human in the loop” to incorporate context-specific judgment into predictive–analytics–based decisions. We study how human discretion over analytics-generated recommendations shapes the creation and mitigation of agency costs. Using proprietary product-assortment data from an automotive parts retailer with both company-owned and franchise stores, we examine discretion in the context of franchisee agency problems. Consistent with theory, we find that, after applying human discretion, franchise stores underinvest in inventory relative to comparable company-owned stores, particularly where inefficient risk-bearing is likely to be more severe. Franchise stores’ stocking decisions also align less closely with future model recommendations, suggesting that informational advantages of local discretion are offset by agency costs. Finally, we show that a corporate central planner—another “human in the loop”—partially mitigates franchisee underinvestment, especially when given sales-based incentives. Our findings illuminate how centralized oversight can complement predictive analytics in franchise systems.

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

"Innovation reshapes supply-chain relationships by changing how suppliers and customers interact, with trade credit emerging as a strategic tool that suppliers use to build, strengthen, and secure relationships with innovative customers."

Presented at the University of Michigan, Brazil Accounting Research Conference, and Emory University

Abstract: How a firm’s innovation affects the firm’s relationship with its trading partners remains underexplored. We empirically analyze the effect of firm innovation outcomes on a key dimension of supply chain relationship—trade credit extension. We find that, following patent issuance, firms receive and use more trade credit from their suppliers in subsequent years. This effect is more pronounced (i) when firms are issued patents with a larger potential for market growth, (ii) when the suppliers are technologically more relevant to the patents, and (iii) when the suppliers face a higher risk of losing the firms as customers. We also find an important business-cycle variation in the link between innovation and trade credit: innovative firms receive and use more trade credit during periods of limited access to bank credit. Overall, our findings provide insights into how innovation shapes supply chain relationships, highlighting trade credit as a strategic tool for suppliers to secure business relationships with innovative customers.

6. Do Accounting Standards for Revenue Recognition Affect Boards’ Performance Evaluation Formula? (with H. Oh and I. Suk)

"We examine how performance evaluation can be adjusted when increases in managerial judgment in financial reporting enhance relevance but potentially reduce the reliability of accounting information."

ABSTRACT: We examine how boards adjust CEO performance evaluation when managerial judgment can enhance relevance yet reduce reliability of accounting information. Across two difference-in-differences models, we find that CEO pay-earnings sensitivity declines after Accounting Standards Codification (ASC) 606 adoption. The effect is concentrated in revenues rather than expenses, and is more pronounced when discretionary revenues are high. The reduction in pay-earnings sensitivity is mitigated when firms have previously provided more conservative, higher-quality earnings and when they disclose disaggregated revenue, suggesting that accounting quality and disclosures help boards maintain CEO pay sensitivity despite increased judgment. Results remain robust when we capture pay-earnings sensitivity using explicit, formula-based provisions. Boards also more frequently include revenue as a standalone performance measure, potentially leveraging the enhanced relevance while strengthening control. Finally, the decline in pay-earnings sensitivity curbs subsequent earnings management, indicating that the boards’ adjustments restrain opportunistic reporting under ASC 606. Collectively, our study provides holistic evidence on how boards navigate the relevance–reliability trade-off amid rises in managerial judgment, as well as the longer-term consequences.