Residual Claimants Research Articles

Information acquisition and tax avoidance: Evidence from a natural experiment

AbstractAnalyzing the launch of high‐speed rail (HSR) services in China as a natural experiment, we identify a positive externality stemming from lower information acquisition costs: the reduction in firms’ overinvestment in tax avoidance. Specifically, we find that outsiders undertake more corporate site visits and firms engage in less tax avoidance after the opening of HSR lines in the cities where these firms are located, leading to enhanced firm value. In another result consistent with expectations, we document that the impact of the introduction of HSR lines on tax avoidance is concentrated in firms in which insiders exhibit a high propensity to extract rents through aggressive tax strategies. Our results imply that more efficient transportation facilitates site visits and the acquisition of firm‐specific information, particularly soft information. This improvement strengthens external monitoring, thereby limiting the ability of insiders to accumulate private benefits under the guise of tax avoidance that benefits all shareholders as the residual claimants.

Cognitive load, social values and financial distress: drivers of restructuring decisions

PurposeThis study aims to analyze the effect of cognitive load and social value orientation on managers’ preferences when they face with two types of restructuring choices in financially distressed firms: the first belonging to the family of organizational restructuring (massive layoffs) and the second to the family of financial restructuring (debt increases).Design/methodology/approachThe authors investigate experimentally the impact of managers’ cognitive load and social value orientation on the decision to restructure leveraged buyout (LBO) firms in financial distress by using either massive layoffs or debt increases.FindingsBy investigating the impact of managers’ cognitive load and social value orientation on the restructuring decision of an LBO firm in financial distress, the research reveals that, on average, cognitively loaded managers prefer massive layoffs over increased debt levels. The massive layoffs seemingly provide a relatively easier way to avoid conflict with influential, residual claimants. In contrast, social value–oriented managers actively avoid massive layoffs and prefer to increase debt.Research limitations/implicationsThese results imply that the performance mechanisms emphasized to improve agency relations, for example, in LBOs, have their own limitations during periods of financial distress. This study shows that one of these limits is related to cognitive distortions and personality traits.Originality/valueIn this research, the originality lies in understanding how managers’ internal factors affect their restructuring decision-making, in the case of LBO firms in financial distress.

Shareholder perceptions of external tax advisors in corporate tax planning

AbstractWe examine shareholders' perceptions about how external tax advisors contribute to corporate tax planning. As residual claimants of corporate tax planning, shareholders benefit from lower corporate taxes, but also bear the financial and reputational costs of subsequent tax enforcement. Despite the influential advisory role of external tax advisors in corporate tax planning, existing research on how shareholders perceive this role is limited. Using event study methods and exploiting the heightened regulation of tax advice through the covered opinion rules as a setting, we observe average and cross‐sectional stock returns consistent with shareholders perceiving external tax advisors as contributing unfavorably to tax planning by promoting excessively risky strategies. We further find that risky and overall tax planning declined across firms after the enactment of the rules, consistent with shareholders' perceptions about tax advisors' contributions to firms' tax planning. Overall, our findings contribute to research on shareholder perceptions and valuation of tax planning, and have important implications for practice, where regulatory oversight of external tax advisors remains a significant concern.

The Behavioral Effects of Social Distance and Residual Claim Distribution on Budget Reporting in Hierarchical Organizations

ABSTRACT We experimentally investigate how subordinates’ budget reporting in hierarchical organizations is influenced by social distance between subordinates and their direct manager. Although prior research promotes reducing this social distance to improve cooperation and efficiency, we contend that reduced social distance can differentially influence budget reporting, conditional on the manager’s stake in the residual claim. As predicted, we find through two studies that the effect of reduced social distance changes from increasing subordinates’ honesty to decreasing subordinates’ honesty as the manager’s stake in the residual claim decreases. We also find that subordinates’ concern for the manager’s economic well-being and concern about the manager’s impression of their reporting behavior mediate these results. The implications of our findings for management accounting theory and practice are discussed. Data Availability: Please contact the authors. JEL Classifications: C91; D91; M41.

Farmland titling, farmland adjustment and rural collective action: Application of institutional analysis and development framework using evidence from China's irrigation commons

The existence of land adjustment undermines the positive effect of farmland titling. This situation not only affects agricultural operation, but also the social governance of rural areas. Using the institutional analysis and development framework, this paper takes the governance of irrigation commons in rural China as an example. Based on 721 household survey data sets, the ordinal regression model and instrumental variable method are employed to examine the relationship between farmland titling, land adjustment, and irrigation collective action. The empirical results show that, on the one hand, farmland titling both clarifies and stabilizes farmers' ownership of the residual claim on land output and encourages farmers to participate in irrigation collective action to ensure their benefits. On the other hand, land adjustment lower farmers' perception of the security of their property rights and discourage long-term investment in agricultural production. This situation not only reduces the incentive for farmers to participate in collective action, but also weakens the promoting effect of farmland right confirmation on collective action. Therefore, future land system reforms should enhance farmers' perception of property rights security and promote the land governance mode. The research conclusions of this paper provide implications for developing countries towards promoting both land system reform and socioeconomic development.

Influence of farmland confirmation on farmland abandonment in China.

The general view is that land ownership affirmation provides incentives for farmers to internalize external benefits, optimizes farmers' allocation of agricultural production factors, and then reduces farmers' farmland wastage behavior. This study examines the influence of residual control and claim rights in farmland right confirmation on farmers' farmland wastage behavior. Results show that residual control rights guarantee the farmers' exclusive right to use the farmland independently, and residual claim stimulates the farmers to pursue the goal of agricultural production surplus value. However, the residual claim rights are related to the constraint conditions of agricultural production; thus, the farmland right confirmation is situational dependent on farmers' farmland wastage behavior. The surplus value of the farming output of low-income families is low, and the willingness to realize the surplus claim through agricultural reproduction is weak. Residual control reduces the risk of land loss, accelerates the transfer of the labor force, and shows the behavior of farmland wastage. Nonpoor households with high agricultural production surplus value tend to increase the allocation of agrarian production factors to maximize the income, improve the allocation efficiency of agricultural land resources, and reduce farmland wastage behavior. Conclusion: The implementation effect of accurate farmland affirmation is progressive and internally unbalanced. The institutional basis of matching policy should be to deal with the relationship between residual control right and residual claim right.

이해관계자 이론의 비판적 검토

Although there exists a significant body of research that criticizes stakeholder theory overseas, it has not been actively discussed in Korea. Five major problems of stakeholder theory are identifed through extensive literature review. First, Freeman’s definition of stakeholder, which is still widely used, is simply too ambiguous. Stakeholder theorists not only include competitors, government and media as stakeholders, but they also include animals and terrorists as stakeholders. Second, imposing multiple fiduciary duties to stakeholders is unethical by itself and may result in manager’s moral hazard. Third, since the interests of stakeholders are well protected by contract law and regulation, additional protection may be redundant. Fourth, stakeholder theorists have been insisting on stakeholder participation on the board (especially labor). But evidence from Germany suggests that it is not working well. Fifth, so-called ‘stakeholder management’ is even more ambiguous and simply re-state existing managerial principles. In addition, three misunderstandings about shareholder primacy model are discussed. First, the purpose of shareholder primacy model is to protect shareholders because shareholders, who are residual claimants, are the most vulnerable stakeholder among all other stakeholders. Second, the current shareholder primacy model does not assume that shareholders ‘own’ the corporation. Third, it was the managers who harmed the company and shareholders in financial scandals such as Enron and Worldcom, not the other way around. Finally, it is suggested that long-term shareholder view can also protect stakeholders’ interests as much as stakeholder theory promises.

Study of the Organizational Structure of Military Hospitals in Selected Countries of the World Based on the World Bank Model - a Qualitative Study

Background: The health has turned into one of the most important issues in different societies; hence, the demand for health-medical services has increased. Objectives: The present study aimed to investigate and use the experiences of the military health system of other countries regarding the organizational structures of their hospitals based on the World Bank Model. Methods: This study based on the model of Perker and Harding investigated and compared the organizational structure of military hospitals in nine countries, namely Germany, Brazil, Turkey, South Korea, South Africa, China, Pakistan, Italy, and Iran through semi-structured interviews. Results: The findings showed that in 18 interviews, 61% of the participants were specialist and subspecialist doctors, and the work experience of 39% of the participants was between 25 and 30 years. The World Bank Model (Preker and Harding), for hospital structure, considers five dimensions, including decision rights, market exposure, residual claims, accountability, and social functions. In the dimension of the decision-making right, the findings indicated the focus of this dimension in the studied countries. Facing the goods and supplies market in a country like South Korea is left to the hospital; however, in South Africa, it is centrally conducted by the Health and Medical Commander. In countries, like South Korea, Pakistan, China, and Iran, the residual claimant is propelled through the creation of committees or supervisory boards, while hospitals have some authority over their residual claimant. In the other studied countries, the authority of all residual claimants is with the highest level of military health and treatment sector of the relevant country. In countries, such as Germany, Italy, and South Korea, accountability towards stakeholders has become decentralized. The dimension of social functions is not considered among the duties of military hospitals; nevertheless, all the studied countries practically had a relatively active presence in the field of social functions and assistance. Conclusion: Given the importance of the health of the military community and the lack of available and published data and studies, it is necessary to make use of the experiences and learnings of this field by conducting studies on the military health system.

Dynamic fairness in repeated bargaining with risk

We study dynamic notions of fairness via an experiment of a two-round bilateral bargaining environment, where the payoff to one player is subject to ex-post risk, while the other player receives a fixed payment, effectively making the player exposed to risk a residual claimant. The ex-post risk not only provides substantive issues for bargaining parties to resolve in the experiment – i.e. what is a fair compensation for the exposure to risk – it also results in the endogenous formation of reference points for the second round due to ex post inequality after the realization of uncertainty in the first round. We find support for a “payback” hypothesis. That is, agreements in the second round significantly differ from the first round in a manner consistent with reducing the inequality that arose due to the initial pie realization.

Introduction: Who Are Residual Claimants on a Company’s Net Assets?

Abstract Two papers on the nature of equity and its implication for accounting and public policy are introduced.

Impact of prevention in primary care on costs in primary and secondary care for people with serious mental illness.

A largely unexplored part of the financial incentive for physicians to participate in preventive care is the degree to which they are the residual claimant from any resulting cost savings. We examine the impact of two preventive activities for people with serious mental illness (care plans and annual reviews of physical health) by English primary care practices on costs in these practices and in secondary care. Using panel two-part models to analyze patient-level data linked across primary and secondary care, we find that these preventive activities in the previous year are associated with cost reductions in the current quarter both in primary and secondary care. We estimate that there are large beneficial externalities for which the primary care physician is not the residual claimant: the cost savings in secondary care are 4.7 times larger than the cost savings in primary care. These activities are incentivized in the English National Health Service but the total financial incentives for primary care physicians to participate were considerably smaller than the total cost savings produced. This suggests that changes to the design of incentives to increase the marginal reward for conducting these preventive activities among patients with serious mental illness could have further increased welfare.

The Effects of Openness of Internal Reporting and Shared Interest with an Employee on Managerial Collusion and Subsequent Cooperation*

ABSTRACTCollusion between managers who share private information represents a significant control concern for firms. Prior research suggests that mutual monitoring contracts that incentivize honest reporting do not prevent all collusion, making it important to understand how elements of the control environment may facilitate collusion, as well as how control choices—and collusion itself—affect subsequent behavior within the firm. Results of two experiments show that the frequency of collusion between managers in a repeated‐interaction setting is greatest when one can view the other's reports before making their own (“open internal reporting”) and slack obtained from misreporting is shared with a non‐reporting employee (“shared interest”). Moreover, although open (versus closed) internal reporting increases collusion in a single‐shot setting with or without a residual claimant to managers' budget reports being present, neither openness alone nor shared interest alone increases collusion in a repeated‐interaction setting. Results further suggest that collusion improves managers' perceptions of autonomy and group identification, resulting in greater cooperation on a subsequent task and potentially reducing the costs of some collusion to the extent such cooperation benefits the firm. Finally, open internal reporting worsens managers' perceptions of autonomy and group identification which, for managers who did not previously engage in collusion, leads to less cooperation on a subsequent task. In total, these results highlight to firms that the costs of collusion in repeated‐interaction settings frequently found in practice may be greatest when the common control choices of open internal reporting and shared interest are made in tandem, and that open internal reporting may carry another unintended cost in the form of lower cooperation on other tasks.

Ethnicity is not public service destiny: The political logic of service distribution in South Africa

Millions of South Africans have protested the unequal allocation of public services in thousands of demonstrations. Despite the African National Congress’s (ANC) promise to reduce the disparities generated by apartheid, the level of public services remains highly uneven across the country. Most studies of service provision in Africa argue that politicians will target their coethnics; others support the “diversity deficit” hypothesis, which predicts that high levels of ethnic diversity undermines service provision. Instead, we argue that explanations of service provision should first examine how political institutions incentivize politicians to choose whether, what, and how to distribute services. Even in an ethnicized polity, ethnic targeting may not be a politician’s best strategy. We seek to explain the variation in service levels across South African municipalities and advance three hypotheses: 1) municipal councilors in more ethnically diverse municipalities will form policy coalitions that produce higher service levels; 2) South African mayors will decrease services when they enjoy electorally safety due to their extensive powers and the possibility of being a residual claimant to municipality resources, and; 3) the strategic interaction between councilors and their mayor helps to account for the variation in service provision across South Africa’s municipalities. We test our hypotheses with data from more than 1.37 million households and aggregated municipality level measures and find strong support for our hypotheses. Political institutions – not just ethnic demography – can influence policy choices and service outcomes.

Bondholders’ returns and stakeholders’ interests

This study examines the relationship between firms’ corporate social responsibility (CSR) or environmental, social and governance performance and bondholders’ returns. We argue that bondholders are fixed claimants who only value firms’ CSR performance in relation to firms’ risks. We hypothesize that firms with CSR concerns or controversies tend to increase firms’ default risk which would adversely affect bondholders’ returns. We also argue that CSR investments (CSR strengths) increase the opportunity for residual claimants (i.e., shareholders) to shift the investment risk to the bondholders. Hence, CSR strengths represent higher asset substitution risk or risk-shifting. We argue that bondholders’ returns and the stakeholders’ interests are aligned when firms have CSR concerns or controversies but their interests are not aligned for CSR strengths since CSR strengths increase asset substitution risk for the bondholders. The alignment and misalignment between bondholders and stakeholders’ interests are moderated by bond maturities and are affected by a negative shock in the credit market. Analysing a sample of 5240 bonds in a portfolio setting from 425 U.S. companies during the pre-green bond era (2001–2014), we find evidence to support our hypotheses.

A stakeholder resource-based view of corporate social irresponsibility: Evidence from China

Following the stakeholder resource-based view (SRBV), we conceptualize the value relevance of corporate social irresponsibility (CSI) based on the stakeholders’ bargaining power and interests in the well-being of the firm, and classify the stakeholders into residual claimants (i.e., customers, shareholders) and fixed claimants (i.e., employees, environment). Using curated detailed news data of 816 CSI episodes and 56,503 Chinese government daily publications from June 2006 to July 2012, we find that CSI episodes alienating residual claimant stakeholders lead to greater shareholder value destruction. Drawing from the stakeholder salience, we find that CSI episodes alienating high legitimacy claims of shareholders and customers, high urgency claims of employees, and powerful claims of customers result in a more pronounced underperformance. Although there are potentially overlapping boundaries between fixed and residual claimants under special circumstances, the findings provide implications for firms making strategic decisions involving multiple stakeholders.

Robust Incentives for Teams

We show that demanding team incentives to be robust to nonquantifiable uncertainty about the game played by the agents leads to contracts that align the agents' interests. Such contracts have a natural interpretation as team‐based compensation. Under budget balance they reduce to linear contracts, thus identifying profit‐sharing, or equity, as an optimal contract absent a sink or a source of funds. A linear contract also gives the best profit guarantee to an outside residual claimant. These contracts still suffer from the free‐rider problem, but a positive guarantee obtains if and only if the technology known to the contract designer is sufficiently productive.

Salt, Smurthwaite, and Smith: The Origins of the Modern Legal Identity of the Church of Jesus Christ of Latter-day Saints

Salt, Smurthwaite, and Smith: The Origins of the Modern Legal Identity of the Church of Jesus Christ of Latter-day Saints

The Peace of God

Scholars have argued that the politically fractured landscape of medieval Western Europe was foundational to the evolution of constitutionalism and rule of law. In making this argument, Salter and Young (2019) have recently emphasized that the constellation of political property rights in the High Middle Ages was polycentric and hierarchical; holders of those rights were residual claimants to the returns on their governance and sovereign. The latter characteristics—residual claimancy and sovereignty—imply a clear delineation of jurisdictional boundaries and their integrity. However, historians’ description of the “feudal anarchy” that followed the tenth-century disintegration of the Carolingian Empire does not suggest clearly delineated and stable boundaries. In this paper, I highlight the role of the Peace of God movement in the 11th and 12th centuries in delineating and stabilizing the structure of political property rights. In terms of historical political economy, the Peace of God movement provides an important link between the early medieval era and the constitutional arrangements of the High Middle Ages.

How Would Medicare for All Affect Health System Capacity? Evidence from Medicare for Some

Proposals to create a national health care plan such as “Medicare for All” rely heavily on reducing the prices that insurers pay for health care. These changes affect physicians’ short-run incentives for care provision and may also change health care providers’ incentives to invest in capacity, thereby influencing the availability of care in the long term. We provide evidence on these responses using a major Medicare payment change combined with survey data on physicians’ time use. We find evidence that physicians increase their time spent on capacity building when remuneration increases, and that they are subsequently more willing to accept new patients—especially those who may be the residual claimants on marginal capacity. These forces imply that short-run supply curves likely differ from long-run supply curves. Policymakers need to account for how major changes to payment incentives would influence the investments that determine health system capacity.

Team incentives under private contracting

AbstractWe model a moral hazard in teams problem in which a profit‐maximizing principal offers private contracts to multiple agents. Public contracts are common knowledge to all agents, but private contracts are known only by the principal and each individual agent. Public contracts can induce efficient outcomes but are subject to effort‐reducing collusion between the principal and any given agent. Private contracts, by construction, are immune to such collusion but necessarily inefficient, as the principal is forced to make the team collectively the residual claimant (on margin), whereas efficiency requires that each individual agent be the residual claimant on his own.