NEW! Overreliance on Data in Forecasting. Gallo, L, E. Labro and J. Omartian (latest version: November 2023)

This paper examines the reliance on data in internal forecasting. Using US Census microdata on plant-level sales growth expectations, we find that plants with higher data intensity make forecasts that are both overly certain and less predictive of actual sales. Although high data intensity plants
suffer from worse forecasting outcomes, they appear to respond more nimbly to unexpected sales growth patterns. Exploring the mechanisms, we find that high data intensity plants issue forecasts that are less idiosyncratic and more like other plants within the firm as opposed to geographic
peers, consistent with overreliance on readily available data crowding out incentives for managers to gather relevant local information. Furthermore, we find that reliance on numerical hard data and statistical model outputs is linked with less predictive forecasts, while soft information is linked to more certain, but no less predictive, forecasts.

NEW! Accounting Regulation in the European Union.  Labro, E. and J. Pierk (latest version: December 2023). Accompanying website: http://www.eu-regulations.com .

We provide a comprehensive overview of accounting-related regulatory changes (financial accounting, auditing, tax, other disclosures) in the 27 EU countries and the UK since the EU’s inception in 1993 (Maastricht Treaty) based on an extensive literature review, a survey, as well as input by country and topic academic experts. The accompanying website (http://www.eu-regulations.com) provides visual representations of these events by country, a short description of the regulation, links to selected relevant literature references, and to the regulations themselves. Our aim is threefold. First, we lower the cost for researchers, reviewers and editors to become acquainted with the rich regulatory setting of each EU country over time. For example, we describe the different layers of the regulatory framework, and variations across and even within Member States. Second, the overview of regulatory changes helps improve research designs by identifying events that may coincide with the regulatory event of interest. Third, we provide researchers with insight into available research opportunities to address their research questions when using the EU or a particular EU country as a laboratory.

Tax-Induced Organizational Complexity and Executive Performance Measurement. Gallemore, J., E. Labro and G. Scanlon (latest version: January 2024)

We examine how tax-induced organizational complexity (“TIOC”), which we define as the organizational complexity that would not exist in a world without differences in tax policy between jurisdictions, is associated with executive performance measurement. While these structures can facilitate lower tax burdens, firms need to design their performance measurement systems to encourage executives to manage the associated complexity to avoid potential negative consequences. Using firms’ subsidiary structures in tax havens and other low tax countries to measure TIOC, and controlling for non-tax sources of organizational complexity, we document several main findings. We find that TIOC is associated with longer-term performance measurement, consistent with boards wanting executives to manage both the often-immediate tax benefits and often-delayed costs associated with TIOC. We also find that TIOC is associated with a greater propensity to use adjusted performance metrics, consistent with firms correcting standard metrics for measurement error and bias introduced by TIOC. Finally, we find that TIOC is associated with a greater usage of unique metrics and lower similarity in metrics across the executive team, consistent with TIOC creating heterogenous activities that top managers need to monitor and manage in support of optimizing taxes. Our study contributes to the tax and managerial accounting literatures by shedding light on how firms manage TIOC via performance measurement.

Consistency is Key: How Costing Information Consistency Helps Hospitals Manage Costs. Labro, E., G. Scanlon and L. Stice-Lawrence (latest version: July 2023)

Health care costs in the United States make up a larger proportion of gross domestic product (GDP) than in any other developed country and continue to rise. We examine whether the use of consistent metrics in costing information systems across hospitals provides one avenue to reduce these costs. We refer to such consistency as “costing information consistency” or CIC and empirically measure it by identifying whether hospitals in a multihospital system share the same costing system vendor. Using M&A activity among vendors as an instrument for exogenous changes in hospital CIC, we find that CIC is associated with a 13.3% reduction in operating expenses, suggesting that increased cost comparability from CIC helps hospitals identify ways to reduce operating expenses by identifying clinical and administrative best practices. Further, it appears that CIC allows hospitals to decrease costs without sacrificing quality of care. We find no significant association between CIC and patient satisfaction, mortality, or readmission rates, and we see that hospitals with increases in CIC reduce expenses related to administrative and support services while increasing resources directly related to patient care. Based on our findings, we estimate that introducing CIC in all inconsistent US hospitals could result in a 3.8% reduction in economy-wide hospital expenses, or roughly $45 billion.

Managing Employee Retention Concerns: Evidence from US Census Data. Labro, E. and J. Omartian (latest version: March 2023)

Using Census microdata on 28,000 manufacturing plants, we examine how firms manage employee retention concerns in response to changes in the local unemployment rate. We show plants increase compensation, but they also take additional steps. First, plants adjust bonus structures to ensure bonuses can be paid. Second, plants offer more agency to employees by deploying high-involvement work practices that generate longer-term commitment. Third, plants increase the availability and use of data and formal information systems to reduce the impact of employee turnover. These results are robust to using the fracking revolution as a shock increasing firms’ retention concerns. We find compensation increases spill over in response to retention concerns at other plants within the firm, consistent with an inequity aversion explanation. Bonus plan characteristics and offering agency to employees does not spillover as readily, suggesting that they may be less expensive retention levers to pull in multi-plant firms.

In-Network Group Auditors and Subsidiaries’ Investment Efficiency . Labro, E. ,  J. Pierk and C. Van Linden (latest version: January 2024)

This paper examines the impact of appointing in-network auditors (i.e., audit firms from the same global audit firm network) in business groups on the investment efficiency of subsidiaries. We use a sample of European business groups for which we observe the parent and both domestic and foreign subsidiaries. Our findings reveal that an audit by in-network auditors does not affect the investment efficiency of domestic subsidiaries but leads to improvements in the investment efficiency of foreign subsidiaries. Specifically, external audits by in-network auditors are associated with a reduced likelihood and reduced extent of over-investments by foreign subsidiaries. While prior research mostly focuses on the role of auditors in providing financial reporting assurance within business groups, our study shows that in-network auditors provide audits with more added value by enhancing subsidiary investment efficiency.