Management by the Numbers: A Formal Approach to Deriving Informational and Distributional Properties of “Unmanaged” Earnings. Hemmer, T. and E. Labro (revised August 2017).

We explore the theoretical relation between earnings and market returns as well as the properties of accounting earnings frequency distributions under the maintained hypothesis that managers use unbiased accounting information benevolently to prudently manage the firms of which they are appointed stewards. We offer this surprisingly uncommon (in the academic literature) perspective to generate untainted benchmarks against which empirically observed earnings-returns relations and aggregate earnings distributions can be evaluated. Our analysis is based on arguably the most parsimonious model of informed managerial decision making and market pricing based on reported earnings possible. It yields the following results: reported losses are less persistent than reported gains, the market response to earnings exhibits an “S-shape” and earnings relate to returns asymmetrically in the way documented by e.g. Basu (1997). Furthermore, the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily unimodal. Instead, it is likely to exhibit a clear discontinuity at zero and looks similar to the plots reported by Burgstahler and Dichev (1997). However, within our set-up, none of these phenomena are due to reporting noise, bias or some undesirable strategic managerial behavior. They are the natural consequences of using past earnings as the basis for prudent managerial decision making that in turn generates the future earnings on which future decisions will be based.

Updating Accounting Systems: Long-Run Evidence from the Health Care Sector. Labro, E. and L. Stice-Lawrence (2016, under revision 2017).

This paper provides evidence on the determinants of and economic outcomes associated with updates of accounting systems over a 24-year time-span in a large sample of U.S. hospitals. We document that a set of previously unidentified determinants drives the updating decision including “waves” of vendor-pushed updates that are taking place across hospitals, and regulatory impetuses at the state and federal level, such as the implementation of price transparency websites and fair pricing measures and the enactment of Sarbanes-Oxley Section 404, that increase hospitals’ demand for high quality accounting information. Using vendor-pushed updates as an instrumental variable, we document that updating of most types of accounting systems results in immediate and significant reductions in operating expenses. Our findings have implications for settings outside of the health care sector, but they are also important in their own right given the current public policy crisis concerning the rising costs of medical care.

Local Variability, Delegation and Performance Management: Plant-Level Evidence from Census Data. Labro, E., M. Lang and J. Omartian (2015).

We propose to provide what is, to our knowledge, the first representative evidence of the relation between local variability, delegation of decision authority and performance management (incentive strength and performance measurement design) for a large sample of US manufacturing plants. While a substantial theoretical literature considers the interplay between these variables, data availability has limited researchers’ ability to construct representative samples of firms for which they can observe such inner workings, and has relied on self-selected, smaller samples. We use new and comprehensive data based on mandatory responses to the Census Bureau’s Management and Organizational Practices Survey (MOPS), the Annual Survey of Manufactures (ASM) and the Census of Manufactures (CMF) for a stratified sample of more than 30,000 US manufacturing plants, not limited to a particular industry, geography, size, or corporate type including both publicly and privately held firms. We apply structural equation modeling techniques to jointly test five hypotheses from the theoretical literature.

A Framework for Conducting Numerical Experiments on Cost System Design. Anand, V., R. Balakrishnan and E. Labro (2017), Conditionally accepted at Journal of Management Accounting Research.

This paper aims to advance the use of numerical experiments to investigate issues that surround the design of cost systems. As with laboratory and field experiments, researchers must decide on the independent variables and their levels, the experimental design, and the dependent variables. Options for dependent and independent variables to include are ample, as are the ways in which we can model the relationships among these variables. We provide a modular framework that provides structure to these variables, their definitions, and the modeling of the relations among them. Further, we offer some insights into the design and layout of output data files, which will allow for easier data analysis. We also present tips on how to report the results from such numerical experiments effectively. Finally, we furnish online the source code in C# for many of these modules. We hope that the framework and guidance provided in this paper will help spur and focus further meaningful work in this important area of management accounting.