ABSTRACT This paper highlights three emerging trends in target setting: (1) Objectives and Key Results (OKRs), (2) sustainability goals, and (3) targets for artificial intelligence (AI) agents. OKR is increasingly used in practice but remains under-researched, offering opportunities to apply existing theories to understand its effectiveness. Although sustainability targets are widely reported externally, their internal use and impact are less understood. Finally, organizations start delegating tasks to AI agents. Target setting can be a means to align autonomous AI agent behavior with organizational goals. Researchers must examine how the direction, reflected in target metrics, and the demands imposed by target difficulty or budget limits, shape AI behavior—sometimes in unintended ways. JEL Classifications: M12; M14; M15; M41.

ABSTRACT This paper examines supervisors’ target setting decisions following managerial turnover, an event largely overlooked in prior studies. Specifically, we test whether regional supervisors use discretion to assign different target levels to new managers compared to those who remain in their business unit. Moreover, we investigate whether the use of past performance and peer performance information in supervisors’ target revisions is sensitive to managerial turnover. Using field data from 113 nursing homes of a large elderly care provider over a three-year period, we provide evidence that supervisors assign relatively lower targets to new managers. Additionally, our results show that, overall, supervisors rely on past and peer performance information to a similar extent when revising targets for new managers, with a more lenient approach if new managers underperform. Our findings suggest that current knowledge about target setting may be incomplete, as supervisors may treat new managers differently. Data Availability: All data are proprietary and protected by a nondisclosure agreement.

ABSTRACT We examine how the alignment of performance measurement and strategy affects performance on a multidimensional task. Our experiment varies both the strategy (speed versus accuracy) of the hypothetical firm for which participants work and the individual performance measure that is reported to them, creating two conditions of clear alignment and two of clear misalignment. We find that although workers are responsive to the performance measure regardless of its alignment, they are also sensitive to the strategy such that costly alignment effects are observed. We also predict and find that workers respond asymmetrically to misalignment in accuracy performance but not in speed performance, demonstrating that the effects of misaligned performance measurement depend on the fit between firm strategy and the nature of the task being performed. Data Availability: Data are available from the authors upon request. JEL Classifications: M40; M41; M50.

ABSTRACT Relative performance information (RPI) represents a potentially beneficial feedback mechanism, but its motivational effects may depend on recipients’ characteristics. This paper explores whether a key employee trait—need for cognition (NFC)—moderates the motivational effects of RPI. Using a laboratory experiment, we find that an expectation of RPI enhances task performance for lower-NFC individuals by increasing effort to search for task-relevant information but has no effect for higher-NFC individuals. These results persist after controlling for RPI’s informational effect. Complementary survey findings reveal that NFC correlates with age, education level, and the performance of cognitively demanding skills. Notably, although lower-NFC individuals benefit most from RPI, they are less likely to seek and receive it. These findings highlight the need for managers to strategically implement RPI to enhance its benefits. Data Availability: Data available upon request. JEL Classifications: M40.

ABSTRACT Many firms implement pay cuts to reduce labor costs during organizational crises and there are different ways to distribute pay cuts among employees. We experimentally investigate how employees respond to equal-share pay cuts compared to performance-based pay cuts. We predict and find that the effect of different ways of allocating pay cuts is moderated by employees’ relative performance before the pay cuts. Compared to equal-share pay cuts, performance-based pay cuts lead to higher performance but only for employees who underperform their peers before the pay cuts. Performance-based pay cuts also result in higher team performance. Interestingly, we also find that when pay cuts are caused by an organizational crisis, low performers do not perceive it as unfair to receive a larger share of pay reduction. Our findings contribute to both literature and practice on pay reduction during organizational crises. Data availability: Data are available from the authors upon request. JEL Classifications: D91; J33; M40.

ABSTRACT This study uses covenant violations as a quasi-natural experimental setting to examine creditors’ roles in shaping corporate cost behavior. Using a regression discontinuity design, I find that cost stickiness experiences a sharp decline following debt covenant violations when control rights are transferred to creditors. The cost stickiness effect is more substantial for borrowers with lower credit ratings and when creditors possess greater bargaining power. The effect is also more pronounced during industry downturns when borrowers have fewer alternative sources of finance. Results are consistent when I use alternative measures of cost stickiness and alternative research designs. Overall, my evidence indicates that creditors play a monitoring role in firms’ cost behaviors and identifies a specific channel (loan covenants) through which the misalignment of incentives can impact cost asymmetry. JEL Classifications: D24; G32; M41.

ABSTRACT In this study, we explore the negative impact of upstreamness on suppliers’ investment quality and management earnings’ forecast accuracy and investigate whether a shared auditor engaged by both a supplier and its major customers could mitigate these effects. Using a comprehensive dataset of multitier supply chains, we find that suppliers located further upstream tend to have lower investment efficiency and exhibit less accurate management earnings forecasts. However, our results also show that the presence of a shared auditor in the supplier-customer pair could alleviate these adverse impacts by enhancing the quality of information in the supply chain. Our findings shed light on the implications of upstreamness in the supply chain, such as reduced investment efficiency and increased management forecast errors and suggest a role for information quality in mitigating these consequences. Data Availability: All data are available from public sources mentioned in the text.

ABSTRACT We examine the interactive effect of justification and ambiguity on the tendency to distort operating decisions in an incentivized experiment. Managers decide whether to drop or keep a project on behalf of the owners. Although dropping the project always leads to higher payoffs for managers, keeping the project leads to higher payoffs to the owners for projects with good future outcomes. Dropping a project with good future prospects is akin to real earnings management (REM), such as cutting R&D to meet bonus targets. We find that justification increases REM when project outcomes are ambiguous but has no effect when the distribution of project outcomes is known. Ambiguity gives flexibility for managers to craft a plausible justification for dropping the project that appears accountable to the owners. The opportunity for impression management makes selfish actions more attractive to managers because it helps to promote a positive social image.

ABSTRACT Using a sample of Australian Securities Exchange Ltd. (ASX) 500 firms over the 2004–2020 period, we find that contracting on corporate social responsibility (CSR) increases the likelihood of CSR restatements and that these restatements are biased toward showing improvements in CSR performance for the current period. This is especially the case when firms contract on social CSR performance measures. We also find that CEOs’ short-term incentive compensation is significantly greater when restatements result in improved comparative performance, but only for firms that contract on CSR. Overall, our results suggest that contracting on CSR is another explanation for the increasing prevalence of CSR restatements and that standard setters should address metrics and measures when formulating policies with respect to CSR reporting. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M12; M14; M52.