Tax-Induced Organizational Complexity and Executive Performance Measurement. Gallemore, J., E. Labro and G. Scanlon (latest version: January 2023)

We examine how tax-induced organizational complexity is associated with executive performance measurement. We define tax-induced organizational complexity (“TIOC”) as the complexity in organizational structures that would not exist in a zero-tax world. While these structures can lead to lower tax burdens, top-level executives need to manage the associated complexity to avoid potential negative consequences, and thus firms with greater TIOC may design their performance measurement systems with this complexity in mind. Using firms’ subsidiary structures in tax havens and other low tax countries to measure TIOC, we find that greater TIOC is associated with multiple aspects of executive performance measurement. First, we find that TIOC is positively associated with the number of unique measures used for each executive and lower similarity in measures used across the top executive team, consistent with TIOC creating heterogenous activities that top managers need to monitor and manage in support of optimizing taxes. Second, we find TIOC is associated with a greater propensity to use adjusted performance metrics, consistent with firms correcting standard metrics for any noise and bias introduced by TIOC and its associated tax planning. Third, TIOC is positively associated with longer-term performance measurement, consistent with boards wanting executives to manage both the short-run tax benefits and potentially longer-run costs associated with TIOC. Our study contributes to the tax and managerial accounting literatures by creating an empirical measure of TIOC and shedding light on how firms manage TIOC via performance measurement.

Association Between Costing Vendor Consistency and Expenses Within US Hospital Systems. Labro, E., G. Scanlon and L. Stice-Lawrence (latest version: December 2022)

Health care costs in the United States make up a larger proportion of gross domestic product (GDP) than any other developed country and are still on the rise. More effective use of information technology systems that track and manage costs in hospitals (costing systems) provide one potential avenue to reduce these costs. We examine whether sharing the same costing system vendor across multiple hospitals in a multihospital system (“costing vendor consistency”) leads to decreases in hospital expenses. We conducted a retrospective, observational study to assess the relation of costing vendor consistency with operating expenses, 30-day mortality, and 30-day readmission rates for a sample of 1,532 nongovernment acute care US hospitals belonging to 345 hospital systems over the years 2006 to 2014. Hospitals that used the same costing system vendor as the majority of hospitals in their multihospital system were said to have “consistent” costing systems. We used an instrumental variables approach with adjustments for hospital characteristics to reduce estimation bias. Instrumental variables estimates showed that costing vendor consistency was associated with a 13·6% reduction in operating expenses ([95% CI −22·4% to −3·8%]; p=0·01). There was no significant difference in 30-day mortality rates between hospitals with consistent and inconsistent costing systems (−0·13% difference [−0·72 to 0·47]; p=0·68) or in 30-day readmission rates (0·22% difference [−0·48 to 0·92]; p=0·54). Hospitals with consistent costing systems delivered more care on an outpatient basis (1·07% difference [0·01 to 2·14]; p=0·05). Based on these findings, we estimate that introducing costing vendor consistency in all inconsistent US hospitals could result in a 3·74% reduction in economy-wide hospital expenses, or roughly $50 billion.

Managing Employee Retention Concerns: Evidence from US Census Data. Labro, E. and J. Omartian (latest version: April 2022)

Using Census microdata on 27,000 manufacturing plants, we examine how firms manage employee retention concerns in response to changes in the local unemployment rate. We validate our measure of employee retention concerns by documenting that local unemployment rate is negatively correlated with voluntary
turnover, the number of new hires and the number of job openings. We document that plants increase compensation in response to retention concerns. Furthermore, plants pull various other, previously unstudied, levers to help retain employees or to mitigate the negative effect on the plant of employee turnover. 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. Last, plants increase the availability and use of data and formal information systems to reduce the impact of employee turnover through hardening of employees’ soft information. We find evidence consistent with inequity aversion resulting in compensation increases at a focal plant because of retention concerns faced at a peer plant, beyond what is warranted by the retention concerns in the focal plant’s labor market. We find that the levers of bonus plan characteristics and offering agency to employees are not subject to such unwarranted spillovers, suggesting that they may be less expensive retention levers to pull in multi-plant firms.

In-Network Auditors as Information Intermediaries Within Business Groups . Labro, E. , C. David, J. Pierk and C. Van Linden (latest version: April 2022)

We investigate if and how in-network auditors (where parent and subsidiary are audited by auditors from the same audit firm network) serve as information intermediaries within business groups. Using a sample of European groups, we show that in-network auditors, in contrast to involving out-of-network auditors, increase the speed at which information is compiled and enhance the comparability of information within groups. We confirm these results through interviews which provide examples of how in-network auditors can improve information flows within groups. As a result, groups and subsidiaries benefit from increased responsiveness to investment opportunities. While prior literature mostly focuses on the role of the auditor in providing assurance to financial reporting, our paper shows that in-network auditors provide increased added value to their audit clients through improved information intermediation within business groups.