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FB Magazine DEC 2020

Faculty Members' Research

Contemporary Accounting Research, 37(2), 1107–1139 (2020)

Walid Saffar

Woo Jong Lee, Seoul National University
Jeffrey Pittman, Memorial University
Walid Saffar, The Hong Kong Polytechnic University

Political uncertainty has attracted considerable attention in both research and public policy circles in recent years. For corporates, it may generate demand uncertainty, a major determinant of cost behaviour, and affect corporate activities. Uncertainty over a possible shift in national leadership may disturb firms’ regular operations and shapes economic outcomes. Such uncertainty reaches its peak during election periods when competing parties formulate their regulatory and economic policies and outline their platforms for stimulating growth.

This study analyses the impact of election-driven political uncertainty on firms’ cost stickiness (varied cost responses to activity changes). By analysing a large panel of elections in 55 countries, the authors show that political uncertainty surrounding elections can affect cost stickiness. They find that the variation in cost behaviours is more obvious during election years and the importance of political uncertainty to cost stickiness is greater in countries with sound political and legal institutions. Their results imply that managers retain slack resources when political uncertainty is high but will be resolved soon.

National elections provide an opportune context for the analysis since they may have major impact on industry regulation as well as tax, trade, and monetary policies and thus the environment in which firms operate. They are well dispersed across countries and over time and the timing is outside firms’ control.

While empirical research primarily examines the impact of political uncertainty on firms’ investment and financing activities, this study estimates political uncertainty’s real effects on corporate decisions. Using a sample of firms from 55 countries, the authors analyse changes in cost stickiness behaviour as political uncertainty shifts surrounding elections by comparing firm activities in the national election year with that in non-election years. Then they examine whether the relation between electoral uncertainty and cost stickiness depends on the soundness of countries’ political institutions, based on their prediction that managers in countries with weak political institutions experience less uncertainty associated with government replacement or policy shifts during elections. They also evaluate whether cross-sectional variation in country-level formal legal and informal institutions moderates the link between cost stickiness and political uncertainty by examining whether the relation between elections and cost stickiness is sensitive to rigidity in employee protection laws.

This study contributes to emerging evidence on cost behaviour by documenting that the extent of cost stickiness varies systematically across countries and over time. It reports initial evidence on the political view of cost stickiness and closes the gap of research on the importance of political uncertainty to the operating choices of firms by exploring the links between political cycles and corporate operational decisions. It sheds light on how to improve forecasts by looking at the relationship between varied cost behaviour and earnings properties. The finding that cost stickiness rises during elections may matter to managers and investors given the reality that a certain degree of political uncertainty is unavoidable such that firms are responsible for dealing with this external risk factor.

Journal of Applied Psychology, forthcoming

Shuping Li

Wen-Dong Li, The Chinese University of Hong Kong
Shuping Li, The Hong Kong Polytechnic University
Jie (Jasmine) Feng, Rutgers University
Mo Wang, University of Florida
Hong Zhang, The Chinese University of Hong Kong
Michael Frese, University of Lueneburg
Chia-Huei Wu, University of Leeds

Literature on personality development mainly adopts two theoretical perspectives. From the classic trait perspective, environmental factors cannot change adult personality traits because personality traits are endogenous. From the transactional perspective, the environment can influence adult personality development, although rarely dramatically. Organizational research mostly assumes that personality traits cause work behaviours and attitudes, not vice versa.

This study looks at personality development from the new angle of work roles (role-based perspective) and examines what, how, and why personality traits develop after one’s adoption of leadership roles. It investigates whether and how transitioning from an employee into a supervisory role (leadership emergence) shapes one’s personality development. The authors propose that during such role transitions, individuals experience increases in job role demands and expectations, fostering growth in conscientiousness and emotional stability. Their findings show that becoming a leader causes subsequent small but substantial increases in conscientiousness over time to cope with new job role demands. The relationship between becoming a leader and change of emotional stability is not significant. Findings of this research provide important implications for both organizations and employees in better planning leadership succession and managing career development.

The authors conduct two longitudinal studies with data from National Survey of Midlife in the United States (MIDUS) and the Household, Income and Labor Dynamics in Australia (HILDA) Survey. They compare the personality development of two groups of participants - a treatment group (becoming leaders group) and a control group (always-employees group). They examine i) the relationship between becoming a leader and subsequent changes in personality traits with a time lag of ten years, and ii) the mediating role of change in job role demands with a time lag of four years.

Results from both studies reveal that after becoming leaders, individuals enhanced their levels of conscientiousness, meaning that they became more dependable, organized, and efficient. Changes of behaviour patterns to fulfil the job responsibilities and obligations of the new roles essentially give rise to changes in conscientiousness. Their findings challenge and complement the dominant view by providing an alternative explanation that becoming leaders may also shape personality traits.

The authors do not observe significant findings on changes in emotional stability. They suggest that future research examines the reasons for specific patterns of change in emotional stability during this period and looks into individual differences in the pattern of change in personality.

This research makes three contributions. First, it sheds light on what and how personality traits change over time after one assumes a supervisory role, and provides insight into which theory is more accurate in accounting for personality change or the lack thereof. Second, it unravels why personality traits develop after one transits from an employee into supervisory role, and paves the way for future research to examine personality change as an important outcome of organizational experience. Third, it offers an alternative perspective on the causal explanation of the relationship between personality and leadership emergence.

Contemporary Accounting Research, forthcoming

C.S. Agnes Cheng

C.S. Agnes Cheng, The Hong Kong Polytechnic University
Peng Guo, Rutgers-The State University of New Jersey
Chia-Hsiang Weng, National Chengchi University
Qiang Wu, Rensselaer Polytechnic Institute

Using a large U.S. sample, the authors find a significant and positive relation between patents and corporate tax planning, and the effect is incremental to the effect of R&D on tax planning. They employ a quasi-natural experiment based on staggered industry-level innovation shocks to identify the positive causal effect of patents on corporate tax planning. They also find that patents are not associated with tax planning for domestic firms, but their association with tax planning is concentrated in multinational firms, which have the ability to shift domestic income to low-tax countries. Moreover, the authors find that the identified effect mainly exists in the post-check-the-box (CTB) rule period when shifting income among affiliates becomes more flexible and convenient. Finally, they use two income shifting models and find that patents, rather than R&D, facilitate tax planning through an income shifting channel. Overall, their results suggest that R&D and patents facilitate firms’ tax planning in distinct ways: R&D facilitates tax planning as intended through tax credits and deductions, whereas patents are used to avoid taxes aggressively by taxpayers through income shifting.

Management Science, forthcoming

Qin Li

Po-Hsuan Hsu, National Tsing Hua University
Dongmei Li, University of South Carolina
Qin Li, The Hong Kong Polytechnic University
Siew Hong Teoh, University of California, Irvine
Kevin Tseng, National Taiwan University

Firms often register trademarks as they launch new products or services. The authors find that the number of new trademark registrations positively predicts firm profitability, stock returns, and underreaction by analysts in their earnings forecasts. Using the Federal Trademark Dilution Act (FTDA) as an exogenous shock to trademark protection, they find that greater trademark protection strengthens the predictability of new trademark registrations. Together, their evidence suggests that investors undervalue new trademark registrations.

Journal of Financial and Quantitative Analysis, forthcoming

Haitian Lu

Iftekhar Hasan, Fordham University
Qing He, Renmin University of China
Haitian Lu, The Hong Kong Polytechnic University

How does social capital affect trust? Evidence from a Chinese peer-to-peer lending platform shows regional social capital affects the trustee’s trustworthiness and the trustor’s trust propensity. Ceteris paribus, borrowers from higher social capital regions receive larger bid from individual lenders, have higher funding success, larger loan size, and lower default rates, especially for low-quality borrowers. Lenders from higher social capital regions take higher risks and have higher default rates, especially for inexperienced lenders. Cross-region transactions are most (least) likely to be realized between parties from high (low) social capital regions.

The Accounting Review, 95(3), 343–370 (2020)

Jonathan Nam

Jonathan Nam, The Hong Kong Polytechnic University

This study examines how cross-firm differences in financial reporting practices affect how peer-firm accounting information is used to evaluate CEO performance. The author proposes that efficient relative evaluation using accounting performance requires peer firms to have comparable financial reporting systems, allowing boards to reduce the information processing costs associated with differences in firms’ financial reporting practices. Supporting this view, when peer selection takes financial reporting comparability into account, he finds evidence that the earnings of peer firms with high financial reporting comparability serve as a performance benchmark for determining CEOs’ cash compensation. His paper empirically corroborates the substantial anecdotal evidence of the use of peer firms’ accounting performance as a significant element in boards’ evaluation of CEO performance.

Management Science, forthcoming

Jeffrey Ng

Travis Chow, The University of Hong Kong
Sterling Huang, Singapore Management University
Kenneth J. Klassen, University of Waterloo
Jeffrey Ng, The Hong Kong Polytechnic University

This study examines the effects of jurisdictions’ corporate taxes and other policies on firms’ headquarters (HQ) location decisions. Using changes in state corporate income tax rates across time and states as the setting, the authors find that a one-percentage-point increase in the HQ state corporate income tax rate increases the likelihood of firms relocating their HQ out of the state by 16.8%, and an equivalent decrease in the HQ state rate decreases the likelihood of HQ relocations by 9.1%. Exploiting the unique tax policy features within the state apportionment system lends strong support to the interpretation that taxation drives this effect. Their analyses also demonstrate that state income tax features affect the destination of the HQ move. They contribute to the literature on corporate decision-making by showing how state income taxation affects a real corporate decision that has significant economic consequences for the company and the state.

INFORMS Journal on Computing, forthcoming

T.C.E. Cheng

Zhixing Luo, Nanjing University
Hu Qin, Huazhong University of Science and Technology

T.C.E. Cheng, The Hong Kong Polytechnic University
Qinghua Wu, Huazhong University of Science and Technology
Andrew Lim, National University of Singapore

A solar power plant is a large-scale photovoltaic (PV) system designed to supply usable solar power to the electricity grid. Building a solar power plant needs consideration of arrangements of several important components, such as PV arrays, solar inverters, combiner boxes, cables, and other electrical accessories. The design of solar power plants is very complex because of various optimization parameters and design regulations. In this study, the authors address the cable-routing problem arising in the planning of large-scale solar power plants, which aims to determine the partition of the PV arrays, the location of combiner boxes, and cable routing such that the installation cost of the cables connecting the components is minimized. They formulate the problem as a mathematical programming problem, which can be viewed as a generalized capacitated minimum spanning tree (CMST) problem, and then devise a branch-and-price-and-cut (BPC) algorithm to solve it. The BPC algorithm uses two important valid inequalities, namely the capacity inequalities and the subset-row inequalities, to tighten the lower bounds. The authors also adopt several acceleration strategies to speed up the algorithm. Using real-world data sets, they show by numerical experiments that their BPC algorithm is superior to the typical manual-based planning approach used by many electric power planning companies. In addition, when solving the CMST problem with unitary demands, their algorithm is highly competitive compared with the best exact algorithm in the literature.

Strategic Management Journal, 41(10), 1933-1951 (2020)

Qi Zhu

Qi Zhu, The Hong Kong Polytechnic University
Songcui Hu, The University of Arizona
Wei Shen, Arizona State University

This study draws attention to the impact of prior board experiences on the variation in new insider CEOs' degree of “insiderness” in terms of commitment to the status quo and their propensity to make strategic change. The authors theorize and find that new insider CEOs' prior board experience at the focal firm has a negative effect on strategic change, whereas their prior board experience at other firms has a positive effect. Moreover, the positive effect of prior board experience at other firms is stronger (weaker) for new insider CEOs who have less (more) prior board experience at the focal firm. Their study contributes to upper echelons theory and research on new CEOs, and has important implications for organizational practices regarding CEO succession and strategic change.