Predictive Analytics and Organizational Architecture: Plant Level Evidence from Census Data. Labro, E., M. Lang and J. Omartian (latest version: June 2020)
We examine the relation between plant-level use of predictive analytics and organizational architecture for more than 25,000 manufacturing plants using proprietary data from the US Census. We provide evidence that, rather than empowering local managers, predictive analytics are associated with increased centralization by headquarters. In particular, we document (1) reduced delegation of data gathering and decision- making to local plants, (2) higher-powered incentives for plant-level employees (firing, bonuses and promotions more closely linked to performance) and greater use of long- term targets, and (3) a more fluid local workforce with fewer managers, more flexible schedules, less specialization and more temporary employees. Plants become more efficient, with lower inventory, increased shipment volume, and narrower product mix.
Auditor Alignment and the Internal Information Environment . Labro, E. , C. David, J. Pierk and C. Van Linden (latest version: February 2020)
We investigate how auditor alignment, i.e. parent and subsidiary are audited by auditors from the same global audit firm network, affects the quality of the internal information environment of groups and their subsidiaries decision making and performance management processes. We predict that auditor alignment improves internal information quality via better information coordination across the group, and via lower internal information asymmetry between parent and subsidiaries. We use a sample of European groups and find that auditor alignment benefits both subsidiaries’ and groups’ internal information environment. At group level, auditor alignment increases the speed with which management releases earnings announcements, is associated with larger analyst following and higher accrual quality. Furthermore, it facilitates group tax planning and investment efficiency. At subsidiary level, we document that auditor alignment decreases the loss-making likelihood as well as improves investment efficiency. We use the staggered introduction of the revised ISA 600, which was incorporated in the applicable audit standards in most countries of our international sample, as exogenous variation in the subsidiary’s auditor alignment likelihood to alleviate endogeneity concerns. Our contribution is of interest to regulators who consider group audits to be a priority topic, and to practitioners and academics alike by demonstrating the benefits of an important audit characteristic, auditor alignment, for the internal information environment of the firm.
Overseeing Innovation. Glaeser, C., S. Glaeser and E. Labro (latest version: May 2020)
We study the effect of senior manager oversight on inventors’ productivity. We use changes in travel times between inventors and their employer’s headquarters caused by flight time changes as sources of plausibly exogenous variation in manager oversight of inventors. We find that oversight increases inventors’ productivity, as measured by equity market returns to patent approval announcements, the number of patent filings, and forward citations received. Oversight also increases inventors’ creativity and propensity to collaborate, and has a greater effect when the manager’s incentive to invest in the inventor is greater. Consequently, manager oversight appears to increase inventor productivity via advising and information sharing, and not via greater control. We also find that the effects of oversight vary with three unique features of innovation: its horizon, its creativity, and the difficulty contracting with inventors. Our results suggest that the primary role of managers in innovative settings is to provide guidance, rather than to exercise control.