Performance reporting and its information processing by professional investors
(funded bei Deutsche Forschungsgemeinschaft DFG, 09/2017 – 12/2021)
The income statement is a core element of financial reporting. Yet, the requirements for the design of the income statement provided by the international standard setter (International Accounting Standards Board, IASB) are vague and leave discretion for preparers of financial reports. In a current discussion paper, the IASB focuses on the decision-usefulness of performance reporting. Until today, a research gap has remained concerning the decision-usefulness of individual performance indicators, their impact on investor information processing and the context-dependence of this process. Therefore, the project aimed at significantly enhancing the theory foundation for the design of income reports via a two-step approach consisting of two experiments with professional investors and lenders: In the first experiment (part A), interrelations between different performance indicators such as profit/loss, EBITDA, and operating income were investigated. Further, the effect on investor information processing of income reports as well as the forecast quality of individual performance indicators were examined. We analyzed investor information processing as a mediator, which determines whether structural changes in the income statement may improve forecast quality and trust in investors’ forecasts. The second experiment (part B) explored whether professional investors and lenders process performance information in a different way and whether this process is moderated by important firm characteristics (profit vs. loss firm). To answer these research questions, eye-tracking is used, which leads to innovative results since it has previously been used only rarely in accounting research.
The optimum level of compression in subjective ratings and the role of performance evaluation accuracy
(funded by Jackstädt Stiftung, ongoing)
Individual performance can be evaluated either objectively through key performance indicators or subjectively through a superior’s assessment. The extant literature provides evidence that subjective performance appraisals are compressed, which means that in most cases, they are too positive and do not adequately capture the differences in employee performance. Prior studies analyze predominantly how this compression effect in superior evaluation arises or how it might be avoided. The behavioral effects of compressed ratings on employee performance, however, have been largely ignored. Economic theories predict diverging performance effects of compressed ratings: agency theory assumes primarily negative effects of compressed ratings on performance since the incentive effects of performance-based compensation contracts are reduced. Behavioral economics theory, in contrast, predicts that evaluation biases in the form of compressed ratings can enhance motivation and perceived fairness. The intended project aims to dissolve this tension through evidence from two real effort experiments: Experiment I analyzes the effects of the level of compression on performance (main effect) and examines if this relationship is moderated by evaluation accuracy, i.e., the extent to which employees’ real effort levels can be observed (interaction effect). It also sheds light on the underlying psychological factors (motivation and perceived fairness) of this relationship. Experiment II then analyzes if the level of compression even affects performance in other unrelated tasks (spillover effect). The project therefore aims to provide initial scientific evidence on the circumstances under which compression induces positive performance effects and intends to derive an “optimum” level of compression. This evidence can be used by many organizations to improve their performance measurement systems.
Pursuing societal aims through corporate participation: Which type of organizational intervention is most effective?
(funded by Berlin University Alliance, 01/2019 - 08/2022)
The proposed research project aims to evaluate the effectiveness of different types of interventions to promote sustainable decisions and actions of individuals and groups in the organizational context of corporations. This includes the idea to inspect possible causes for individually differing reactions. The corporate context is particularly suited to analyze the social dimension of contributions to sustainable development, because interactions between individuals, groups, and the organizational unit are governed by common rules of interacting, and changes in organizational behavior induced by different types of interventions can be traced. We aim to simultaneously investigate contributions to all three dimensions of sustainable development (economy, ecology, society) to explicitly address their interrelations. The parallel consideration of differences on an individual level (e.g., personality, situation perception, motivation) underlines the transdisciplinary character of this research project. Building on this theoretical work, we will design and implement a laboratory experiment to collect initial evidence. The experimental research design aims to establish causalities between the implemented incentives and the observed outcomes while taking the moderating influence of psychological constructs into account.