More from these Authors

• Working Paper | HBS Working Paper Series | 2019

  The Effect of Systems of Management Controls on Misreporting

  Aishwarrya Deore, Susanna Gallani and Ranjani Krishnan

  Organizations use systems of controls to encourage goal congruent employee behavior. Some control instruments within the system (e.g., cultural controls) guide employees and align their behavioral choices with organizational values, while other instruments (e.g., budgetary controls) facilitate resource allocation in the presence of asymmetric information. We explore how a system of controls comprising of cultural controls (i.e., mission statements) and budgetary controls influence budgetary misreporting. Experimental results indicate that a mission statement that emphasizes integrity results in lower misreporting when combined with budgetary controls that assume self-interested managers relative to its combination with budgetary controls that assume honest managers. Mission statements that emphasize financial performance do not reduce misreporting when combined with either type of budgetary controls. Organizational stewardship partially mediates the effect of systems of controls on misreporting. Our study contributes to the literature on systems of controls by providing evidence that certain combinations of control instruments are more effective than others in achieving important organizational objectives such as reducing budgetary misreporting.

  Keywords: directing controls; misreporting; mission statements; participative budgeting; stewardship theory; systems of management controls; Management Systems; Governance Controls; Mission and Purpose; Financial Reporting;

  Citation:

  Deore, Aishwarrya, Susanna Gallani, and Ranjani Krishnan. "The Effect of Systems of Management Controls on Misreporting." Harvard Business School Working Paper, No. 20-053, October 2019.  View Details

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• Case | HBS Case Collection | October 2019

  Facebook's Libra: The Privatization of Money?

  Marco Di Maggio, Ethan Rouen, Georgios Serafeim and Aldo Sesia

  Citation:

  Di Maggio, Marco, Ethan Rouen, Georgios Serafeim, and Aldo Sesia. "Facebook's Libra: The Privatization of Money?" Harvard Business School Case 120-021, October 2019.  View Details

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• Working Paper | HBS Working Paper Series | 2019

  Core Earnings: New Data and Evidence

  Ethan Rouen, Eric C. So and Charles C.Y. Wang

  Using a novel dataset that comprehensively classifies the quantitative financial disclosures in firms' 10-Ks, including those hidden in the footnotes and the MD&A, we show that disclosures of non-operating and less persistent income-statement items are both frequent and economically significant, and increasingly so over time. Adjusting GAAP earnings to exclude these items creates a measure of core earnings that is highly persistent and that forecasts future performance. Street earnings for firms that meet or just beat analyst expectations are more likely to selectively exclude these items. Analysts and market participants also are slow to impound the implications of these items. Trading strategies that exploit cross-sectional differences in firms' transitory earnings produce abnormal returns of 7% to 10% per year.

  Keywords: core earnings; transitory earnings; non-operating earnings; quantitative disclosures; Equity Valuation; big data; Business Earnings;

  Citation:

  Rouen, Ethan, Eric C. So, and Charles C.Y. Wang. "Core Earnings: New Data and Evidence." Harvard Business School Working Paper, No. 20-047, October 2019. (Revised November 2019.)  View Details

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