Research
My overall research agenda is to study how external and behavioral influences on corporate decision-making can affect fundamental value creation by a firm. One stream of research is on impact of earnings management on the science and practice of strategic management. This examines the effect of earnings manipulation on econometric models of interest to strategy scholars as well as the upstream and downstream strategic decisions of a firm engaging in earnings manipulation. The second stream of research is on the sequencing of corporate scope actions, particularly in the context of M&A deal termination.
Making it or faking it?: Earnings smoothing, performance feedback, and the impetus for strategic change
A core prediction of the behavioral theory of the firm is that a firm’s propensity for organizational change depends on performance relative to its aspirations. Financial performance has most often been measured in this literature using reported accounting earnings (such as return on assets); however, some managers actively manipulate reported earnings to smooth them through accounting and operational choices. This study finds that aspiration levels provide salient targets for earnings smoothing, that such manipulation reduces the propensity to engage in subsequent resource allocation change, and that distance from reported earnings to aspirations (independent of pre-manipulated performance) partially mediates this relationship. This study utilizes an instrumental variable along with Lewbel instruments (to evaluate exogeneity restrictions) to causally identify the linkage between earnings smoothing and strategic change.
Does Earnings Management Matter for Strategy Research?
Strategic management research often uses accounting data, despite well-known concerns that earnings management could obscure the link between actual and measured performance. We apply methods from the econometric literature on bunching to estimate that around 15 percent of firm-year observations in Compustat manipulate accounting earnings to achieve profitability. We show that cash-based performance measures are less susceptible to manipulation and that the choice of accrual versus cash-based measures “matters” for two classic strategy research questions: a decomposition of ROA variance and an analysis of persistence in firm performance. These findings underscore the importance of robustness testing and contribute to an emerging literature that reconsiders the link between theoretical constructs and empirical performance measures.
From Perfect to Practical: Partial Identification Methods in Strategic Management Research
Strategy and management scholars have increasingly used difference-in-differences (DD) and instrumental variables (IV) designs to identify causal effects. These methods rely on untestable identifying assumptions to interpret the results as causal. “partial identification” techniques allow researchers to draw causal inferences from imperfect identification strategies by quantifying how results change with the severity of a violation of the identifying assumption. We explain how these tools work in the context of DD and IV designs, provide practical guidance to apply them, and illustrate their use in an empirical example that investigates how first patents affect inventor mobility. In doing so, we emphasize the role of theory, context, and judgment when deciding how strongly to infer a causal relationship from an empirical result.
Build, Borrow, Buy... or Bail?: Divestiture Following M&A Deal Termination
The relationship between divestitures and acquisitions is generally understood as freeing up resources before acquisition or removing redundant parts or addressing underperformance after acquisition. We theorize an additional relationship—if an announced acquisition transaction fails to close, we predict when the bidder may divest resources related to the target firm. We augment previous methodological approaches with a novel method: matching successful and unsuccessful acquisition bids using the perceived risk of deal failure by using deal arbitrage spreads. Consistent with this argument, we find that bidding firms make more divestitures in sectors proximal to the target after a failed bid.