Hofmann explores how variations in transparency regulation affect tradeoffs regarding performance monitoring and the design of the firm’s organizational structure. Specifically, B03 focuses on the effect of the regulated transparency environment on the optimal allocation of authority within a given hierarchy, the optimal design of the hierarchy in terms of span of control and the depth of the hierarchy, and the promotion of individuals within a hierarchy. The theoretical findings of B03 will highlight a significantly underexplored real consequence of transparency and will be tested based on survey data collected in coordination with B04 and C01.
How does mandatory financial reporting-induced transparency affect organizational design?
In recent years, managerial incentives have been discussed intensively by shareholders, regulators, and the public at large. Transparency regulation often mandates firms to generate and disclose more and more detailed information to external recipients. For instance, regulation related to Corporate-Social-Responsibility reporting mandates disclosure of firms’ green footprint and segment reporting mandates disclosure of divisional performance besides firm performance. As the additional information can also be used to motivate managers, transparency regulation likely affects firms’ organizational design.
This project studies the interactions between transparency regulation and firms’ optimal organizational design (in terms of organizational structure, performance monitoring, and compensation plans), where the latter provides explicit and implicit incentives to managers. First, we investigate the real effects of transparency regulation on the firm’s organizational structure. Second, as a firm’s performance-monitoring system also makes its employees’ contribution to firm output transparent, we investigate how transparency regulation affects within-firm transparency. Third, to the extent that the information generated for performance monitoring is also disclosed externally, we provide important insights on the indirect effects of increased mandatory disclosures on the overall quality of information available to external recipients.
The theoretical findings of this project will highlight a significantly underexplored real consequence of transparency and will be tested based on survey data.