March 2005
Faculty Findings
Taking the hint
By: Becky Wiese
How a few words can bias accountants’ expert testimony.
If you’re a cynic with regard to the objectivity of our judicial system, take note: new research shows how the outcome of auditor-liability cases can be swayed by just a few quick comments.
In a study of accountant expert witnesses and trial judges published this year in The Accounting Review, Professor Dave Ricchiute established a link between attorneys’ hints, expert testimony, and settlement verdicts. Ricchiute’s first experiment, conducted with partners and managers of a Big Five accounting firm, demonstrated that an accountant’s prior knowledge of an attorney’s line of reasoning often swayed his expert testimony. A corollary study then found that trial judges’ decisions leaned in the direction of the experts’ reports.
Despite expressing confidence that accountant experts “come to the task objectively,” Ricchiute explains that his research uncovers “the likelihood for unintentional bias.” Conflicted testimony violates the Federal Rules of Evidence. And because litigation services have become a significant market niche among practicing accountants, Ricchiute’s study suggests implications for further research, practice, and education of accountants and attorneys.
Contact Professor Dave Ricchiute at David.N.Ricchiute.1@nd.edu
The Thorny Knot of Workplace Envy
By: Becky Wiese
Dryden called envy “the jaundice of the soul,” while for John Churton Collins it was “the sincerest form of flattery.” So what do we make of envy in the workplace?
Management Professor Bob Vecchio found the naturally competitive atmosphere of the workplace to be fertile ground for such begrudging behavior. His study, published in Cognition and Emotion, is the first to examine both sides of the workplace envy equation: envying and being envied by one’s co-workers.
Vecchio concludes that being envied and feeling envious create distinctly different outcomes. While being the target of envy does not correlate with factors such as gender, age, education, self-esteem or job satisfaction, it does correlate with greater job longevity. By contrast, employees who report feeling envious toward others also report lower job satisfaction, lower self-esteem, and lower quality working relationships with supervisors.
His findings also reveal a joint influence of employee Machiavellianism (use of political behavior to seek social advantage) and the quality of the working relationship with one’s supervisor, such that an employee who is both highly Machiavellian and enjoys a high quality working relationship with the supervisor is also more likely to be the target of co-worker resentment.
Contact Professor Bob Vecchio at Robert.P.Vecchio.1@nd.edu
Behavioral Finance: Oxymoron?
By: Mary Hamann
What if investors do not behave rationally according to longstanding market theory? What if their pervasive psychological biases influence the market as a whole—and markets don’t really reflect a correct price?
These questions are at the foundation of behavioral finance, a controversial new area of study. Last October, the Mendoza College of Business Finance Department sponsored a conference with leading researchers in the field from Princeton University, Northwestern University, and the University of Amsterdam, among others.
Some of their findings were provocative:
• Because individuals prefer to invest in local businesses, companies will have higher stock prices if they are located in areas with fewer companies and more dollars to be invested. Research shows this bias alone should increase a small company’s stock price by 14%.
• Individual investors tend to trade too much and think they are better at picking stocks than they actually are. Men, in particular, are subject to what radio host Garrison Keillor might dub the “Lake Wobegon Syndrome.” Men trade more than women do, pay more in transaction costs, and are shown to have poorer investment returns.
While research in behavioral finance is moving into the mainstream, major questions remain about its application to the study of markets. Traditional finance theory holds that the actions of individual investors tend to be random and to balance each other out, so that the markets do reflect an accurate price. Behavioral finance scholars are wondering, what if they don’t?
Contact Mary Hamann at Mary.K.Hamann.4@nd.edu
The Business of Trust
By: Rachel Reynolds
Ability—Possessing the skills to get the job done.
Benevolence—Caring about the other person.
Integrity—Adhering firmly to a code of moral or ethical values.
Does trust among employees translate into financial performance? Impact operations and cash flow? Drive the bottom line?
You bet, says Associate Professor of Management James Davis. He and research colleagues have extensively studied trust and created instruments for measuring it in organizations. He said executives who are worthy of trust and understand its pivotal role in a company have a competitive edge.
“It should be as important as the CEO’s understanding of the markets,” Davis said. “This is more than just icing on the cake, it is necessary. It is cake.”
A recent study by Davis shows that a restaurant chain experiencing 100 percent annual turnover in some of its stores had lower turnover in places “where trust was high for the general manager.” Davis said, “We checked accounting returns, and it
was a direct correlation between the level of trust, turnover, and total performance.”
For years, trust in an organization was considered one of those “soft” intangibles that were nice to have—but not essential—touted in colorful marketing brochures and teambuilding exercises. No more.
“Up until this research, there’s been no systematic approach looking at trustworthiness, and trust, and executives’ ability to manage trust,” said Davis, who advises corporate boards of directors on hiring and firing decisions. “It directly affects the bottom line.”
Davis’ seminal work entitled “An Integrative Model of Organizational Trust,” which appeared in the Academy of Management Review in 1995, set the standard for trust research in organizations and discussions in academia and industry.
“The world was ready for it so it took off,” Davis said. “And now, everybody builds on that foundation.”
The Conflict Management Division of the Academy of Management Review named the study, which has been cited in more than 300 publications worldwide, as the most influential article published in the late 1990’s.
In it, Davis and colleagues identified three components of trust—ability, benevolence and integrity—and created scales for measuring these qualities in individuals and in organizations. Are you trusted? Whom should you trust—as an employee, a business partner, a supplier?
Ability is defined as possessing the skills to get the job done. Benevolence is defined as caring about the other person. And integrity is defined as adhering firmly to a code of moral or ethical values. Individuals and organizations that score high on all of these are trusted by their peers and in the marketplace.
If an individual scores high on one or two—ability, benevolence, integrity—and low on the other(s), then risk increases. The other party in the interaction may or may not trust, and, therefore, may or may not transact.
“This model has also been used in strategic alliances,” Davis said. “Does this company trust this company? If trust is there, you don’t have to go back to the legalistic remedies...(which) are much more expensive...trust is just a much more powerful mechanism for work.”
Davis’ research has included studying companies in the Midwest and Southeast in which supervisors were eliminated and teams worked on their own, without monitoring and control.
“They have trust within the company,” Davis said. “And so, you don’t have that layer of management. So there’s cost savings, there’s performance increases.”
Davis, who also has a graduate degree in psychology, teaches corporate strategy. He teaches students to execute a business plan, and he discusses methods for revealing and improving their ability, benevolence and integrity.
“Showing that you have the ability makes all the difference in the world,” Davis said. “It’s like when you have a winning football coach, you can get the team to follow that guy to the moon.”
He said that benevolence and integrity are important, too. Any attempt to increase one’s benevolence or integrity must be sincere and bone-deep. It cannot be an act, a “management technique.”
“As a manager, I can affect my employee’s perceptions of my benevolence towards them—is that management or is that manipulation?” Davis asked. “It’s got to be lasting and sincere to work.”
Do employees know the difference?
“Oh, yes. I would say definitely, definitely in the long run,” Davis said. “If it’s an insincere boss, it (modeling false benevolence and integrity) will actually damage trust. It will make those perceptions even worse. And so it has to be sincere.”
Davis is currently using his trust instruments to research organizations with “social capital.” He describes “social capital” as employees’ willingness to pull together, “if somebody succeeds, there is general joy; if somebody is struggling, people jump in.” These organizations are greater than the sum of their parts, and they are the opposite of places where “I am punching the clock and I am outta here.”
Where there is trust and communication, there is social capital.
Davis said that social capital—similar to brand equity—can affect the valuation
of a company. And he foresees measuring a company’s social capital before deciding whether to do an acquisition, merger or strategic alliance, and measuring a management team’s social capital before investing venture capital.
Social capital requires trust at the highest levels.
“A leader is absolutely vital to this process,” Davis said. “Absolutely critical.
You get the right leader, it’s amazing.”
Professor James Davis has done extensive research on the topic of trust and the components that comprise this virtue. Davis co-authored “An Integrative Model of Organizational Trust,” which appeared in the Academy of Management Review, with Robert C. Mayer and F. David Schoorman.
Contact Professor James Davis at Davis.31@nd.edu