This paper provides a theory of firm behavior motivated by moral duty, self-interest, and social pressure. A morally managed and a self-interested firm compete in a market in which their corporate social performance (CSP) provides product differentiation. Some citizens have altruistic or warm glow preferences for products with associated CSP, personal giving to social causes, holding shares in firms providing CSP, and contributing to social pressure to increase CSP. Social pressure is delivered by an activist NGO funded by voluntary contributions by citizens. The model characterizes an equilibrium in the product market, the capital market, and the market for social pressure. The equilibrium establishes a price for CSP and for activist-induced social pressure. The theory provides predictions of the market values of firms, the prices of products, firm profits, target selection, contributions to the activist, and the amount of CSP supplied. For example, if citizens do not distinguish between morally motivated CSP and CSP induced by social pressure, the activist is more likely to target the softer, morally motivated firm.

The article analyzes a management transition phase typically experienced by growing startup companies when they have acquired more employees than can be effectively managed on an informal basis. This usually occurs in the 50 to 100 employee range, and is often associated with fears that the company is becoming stodgy and losing its entrepreneurial edge. Research is presented which indicates that successfully implementing professional management systems at this stage causes firms to enjoy higher growth than firms which fail to do so. The article addresses why companies adopt and how they use various management systems. Reasons for adoption include both internal and external needs, such as conveying core values to employees and customer, implementing consistent and fair employee evaluations, ensuring accountability, and compliance with regulations.

I analyze a manager's optimal earnings forecasting strategy and optimal earnings management policy in a setting where both the mean and the variance of the distribution generating the firm's cash flows are unknown. The analysis shows that the equilibrium price of the firm is a function of the manager's forecast, the firm's reported earnings, and the squared error in the manager's earnings forecast. The model contains several predictions, including: (1) the manager manipulates earnings to reduce his forecast error at the earnings announcement date; (2) the firm's stock price is more sensitive to the firm's actual earnings announcement than to the manager's forecast; and (3) controlling for the level of reported earnings and the magnitude of the earnings surprise, the firm's price is higher when it has a positive surprise at the earnings announcement date than when it has a negative surprise.

This study examines whether Chief Executive Officer (CEO) equity-based holdings and compensation provide incentives to manipulate accounting reports. While several prior studies have examined this important question, the empirical evidence is mixed and the existence of a link between CEO equity incentives and accounting irregularities remains an open question. Because inferences from prior studies may be confounded by assumptions inherent in research design choices, we use propensity-score matching and assess hidden (omitted variable) bias within a broader sample. In contrast to most prior research, we do not find evidence of a positive association between CEO equity incentives and accounting irregularities after matching CEOs on the observable characteristics of their contracting environments. Instead, we find some evidence that accounting irregularities occur less frequently at firms where CEOs have relatively higher levels of equity incentives.

The French opposition to the war in Iraq in early 2003 prompted calls for a boycott of French wine in the United States. We measure the magnitude of consumers’ participation in the boycott, and look at basic evidence of who participates. Conservative estimates indicate that the boycott resulted in 26% lower weekly sales at its peak, and 13% lower sales over the 6 months period that we estimate the boycott lasted. Although theory suggests consumers would not participate in boycotts due to a free-rider problem, these findings indicate that businesses should be concerned that consumers may boycott their products. We also find that neither political preferences nor media attention are important determinants of boycott participation.

This study examines the relationships among dispositional sources of value preferences and personality attributes, organizational commitment, and satisfaction using a longitudinal sample from MBA graduates in a U.S. business school. After examining and comparing four types of models: (1) direct effects of dispositions on organizational commitment; (2) direct effects of dispositions on organizational satisfaction; (3) direct effects of dispositions on organizational satisfaction, which in turn explains organizational commitment; (4) mediation effects of organizational satisfaction on the relationship between dispositions and organizational commitment, the study shows that the models of direct effects of dispositions on organizational commitment, and the mediation effects of organizational satisfaction on the relationship between dispositions and organizational commitment are considered as reasonably good fit models. Ideal organizational values of freedom and reward-based value orientation have a direct relationship with instrumental commitment, and personality attribute of interpersonal relationship has a direct relationship with normative commitment. In addition, organizational satisfaction partially mediates the relationship between aggressiveness and instrumental commitment, along with the relationship between norm-favoring tendency and normative commitment. The results suggest that dispositional sources of individuals are powerful to have a relatively long-term impact on the relationships between individuals and organization.

To many, the principal–agent model is the obvious lens through which executive pay should be viewed. Such a sentiment sits uncomfortably with a large number of empirical studies suggesting that the process of determining executive pay seems to be more readily explained by recourse to arguments of managerial power and influence. This article investigates the micro-underpinnings of boardroom behavior in order to explain this departure from principal–agency theory’s argument that executive compensation serves to align interests between the owners of the company and its senior managers. We find that there are strong interaction effects among social influence variables and the social setting of boardroom activity. Generous pay awards, bearing only a weak connection to corporate performance, are explained in the context of the social psychology of the boardroom. These results and a review of the empirical research suggest the need for a more comprehensive model of executive compensation that incorporates both economic and psychological determinants.

The two major paradigms in the theoretical agency literature are moral hazard (i.e., hidden action) and adverse selection (i.e., hidden information). Prior research typically solves these problems in isolation, as opposed to simultaneously incorporating both adverse selection and moral hazard features. We formulate two complementary generalized principal-agent models that incorporate features observed in real-world contracting environments (e. g., agents with power utility and limited liability, lognormal stock price distributions, and stock options) as mathematical programs with equilibrium constraints (MPEC). We use state-of-the-art numerical algorithms to solve the resulting models. We find that many of the standard results no longer obtain when wealth effects are present. We also develop a new measure of incentives calculated as the change in the agent's certainty equivalent under the optimal contract for a change in action evaluated at the optimal action. This measure facilitates interpretation of the resulting contracts and allows us to compare contracts across different contracting environments.

Theories matter because they affect behavior and can, under certain circumstances, become self-fulfilling. For a theory to become self-fulfilling, people must be aware of the theory and have the ability to make choices according to its dictates, social and physical arrangements are altered on the basis of the theory’s prescriptions, and the proponents have the power to implement social arrangements consistent with the theory. Economics and other social science theories often fulfill these conditions, with implications not only for the work of scholars, but also for how we think about testing theories that can change the world they describe. Examples include socially responsible investing practices and the role financial theory has played in securitization and the subprime mortgage meltdown.