Internal Forecasts in Multi-Location Firms. Gallo, L, E. Labro and J. Omartian (latest version: December 2024)
We investigate the dynamics of internal forecasting in multi-location firms and the relations between forecast characteristics, productivity, and investment. Using US Census microdata on plant-level growth expectations, we find that plants within multi-location firms face significantly greater productivity penalties for failing to anticipate downside risk. Despite this, these plants make forecasts that are both overly certain and less accurate than those of standalone plants. Comparing growth forecasts across same-firm plants, differences between peer and focal plants predict forecast errors and relate to investment decisions at the focal plant, suggesting that information from multiple sources is integrated into capital allocation decisions. This link to peer forecasts is greater when uncertainty at the focal plant is greater, which may weaken individual plant managers’ incentives to consider extreme scenarios when forecasting.
Accounting Regulation in the European Union. Labro, E. and J. Pierk (latest version: December 2024). 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 regulations, 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: June 2024)
We investigate the relationship between tax-induced organizational complexity (TIOC) and executive performance measurement. We define TIOC as organizational complexity that would not exist in a world without differing tax policies across jurisdictions. While these structures can reduce tax burdens, firms must design their performance measurement systems to ensure executives effectively manage this complexity. Measuring TIOC using firms’ subsidiaries in tax havens and other low-tax countries, and controlling for non-tax sources of organizational complexity, we find first that TIOC is associated with longer-term performance measurement, consistent with executives needing to manage both the often-immediate tax benefits and often-delayed costs associated with TIOC. Second, TIOC is associated with a higher use of adjusted performance metrics, suggesting firms correct standard metrics for TIOC-induced measurement error and bias. Finally, TIOC is associated with more unique metrics and lower similarity in metrics across the executive team, consistent with effective management of TIOC requiring diverse activities.
Consistency is Key: How Costing Information Consistency Helps Hospitals Manage Costs. Labro, E., G. Scanlon and L. Stice-Lawrence (latest version: November 2024)
Health care costs in the United States make up a larger proportion of gross domestic product than in any other developed country and continue to rise. We examine whether the use of consistent costing information across hospitals (“costing information consistency”, or CIC) provides one avenue to reduce these costs. We empirically measure CIC at the hospital level by identifying whether a given hospital’s costing system vendor is the same as the primary (most prevalent) costing vendor in the hospital group to which the hospital belongs. Using M&A activity among costing system vendors as an instrument for exogenous changes in hospital CIC, we find that CIC is associated with an 18.7% reduction in operating expenses, suggesting that increased cost comparability from CIC helps hospitals identify ways to cut costs. These cost reductions appear to be achieved without compromising quality of care. We find no significant association between CIC and patient satisfaction, mortality, or readmission rates. Reductions in expenses as the result of CIC are concentrated in non-clinical services such as administration, medical records, and housekeeping. We estimate that introducing CIC in all inconsistent U.S. hospitals could result in a 2.6% reduction in economy-wide hospital expenses, or roughly $30 billion.
In-Network Auditors and Foreign 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.
