Financial Decisions and Top Management Team Composition

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Financial Decisions and Top Management Team
Composition

• Conrad S. Ciccotello, Edward J. Conrad, Michael
  J. Fekula, and C. Terry Grant
• By David Bernhard Jason Gutzmer

Who is that?
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Introduction

• Top Management Teams TMT (above vice president
  level)
• Early adopters TMTs have a stronger functional
  orientation toward accounting and finance
• Early adopters TMTs also have new members,
  relative to control group, suggesting a bias
  toward action

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SFAS 106

• Employers Accounting for Post Retirement Benefits
  other than Pensions
• -Generally, SFAS 106 has a large negative impact
  on income

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Introduction (Cont)

• The firm level results suggest that managers who
  choose to adopt SFAS No. 106 early do so to
  either address political costs or communicate
  expectations for strong future performance

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Introduction (Cont)

• Since early adoption alters the status quo, and
  appears to be done for sophisticated accounting
  and finance reasons, the findings demonstrate a
  link between TMT composition and financial
  decision making.

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Top Management Team Hypothesis

• Early research indicated TMTs with longer tenures
  exhibit a larger commitment to the status quo.
  The arrival of a new TMT member often leads to
  strategic changes and new initiatives

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Top Management Team Hypothesis (Cont)

• Characteristics of the TMTs of early adopters
  versus a control group comprised of TMTs of firms
  that do not adopt early. Early adoption is
  consistent with a bias toward action, and
  inconsistent with a high level of satisfaction
  with the status quo. If TMTs with longer tenures
  are more reluctant to engage in early adoption,
  then the TMTs of early adopters should have
  newer members than the control group

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Hypothesis 1

• TMTs of early adopters have newer members than a
  control group of nonearly adopters

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Hypothesis 1 (equation)

• 14 years experience as member of TMT
• - 2 years experience as member of TMT
• 12
• The bigger this number is, the more likely that
  the TMT will change past patterns and consider
  new practices, policies, or strategies.

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Hypothesis 2

• TMTs of early adopters have greater tenure
  heterogeneity than a control group of nonearly
  adopters

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Hypothesis 3

• TMTs of early adopters have smaller team size
  than a control group of nonearly adopters

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Hypothesis 4

• TMTs of early adopters have more of a functional
  orientation toward accounting and finance than a
  control group of nonearly adopters

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Data Methods

• This study only uses companies that solely
  adopted SFAS 106!(78 firms)
• There were several companies that adopted SFAS
  106, along with other accounting changes.
• All hypothesis were proven with the exception of
  Hypothesis 3. TMT size did not have an effect on
  Early Adoption

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Reasons Behind Early Adoption of SFAS 106

• Sophisticated accounting procedures
• Political Cost Motivation
• Signaling Motivation and Market Performance
  Changes

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Sophisticated Reasons

• Done for a reason to convey a message or obtain
  benefit

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Signaling Motivations

• Used to signal improved future performance to
  outsiders (insider information)
• Big Bath theory

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Political Cost Motivation

• Income Deflation
• Protects against political vulnerability

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Conclusion

• Study provides insight into TMT make up and
  accounting decisions
• Provides details and reasons for early adoption
  of new accounting standards

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Future Implications

• Early Adoption of new rule SFAS 154
• Possible new rules concerning Leases and Pensions