Management Accounting Section Midyear Meeting

Chairman Individualism and Target Ratcheting

• In Event: Budgeting and Target Setting I

Abstract

In this paper, we examine how chairman individualism, characterized by individual achievement, self-orientation, and autonomy, may affect the target setting process of revenue performance. Prior studies document a target ratcheting phenomenon that firms set and revise future performance targets based on their past performance. However, this target setting practice may result in a negative incentive effect where self-interested managers withhold current period efforts to avoid higher future targets. Using a chairman’s native place of origin in Northern China to proxy for her individualism, we find a positive relation between a chairman’s individualism and target ratcheting, suggesting that firms with greater chairman individualism are more likely to revise targets upward. We further document that the negative relation between upward target revision and the probability of achieving the target is weaker in firms with higher chairman individualism, indicating that chairman individualism mitigates the adverse incentive effect caused by target ratcheting. Further evidence suggests that the effect of chairman individualism on target ratcheting is weaker when board independence is higher, suggesting that stronger corporate governance constrains the chairman’s risk-taking and self-serving behavior in the target-setting process. Finally, we find that individualistic chairmen boost sales through more extensive M&A activities. Our study sheds light on the role of top executives’ individualistic personal traits on revenue target setting process.

Authors

• Rong Huang, Fudan University/Baruch College

• Wei Jiang, Jinan University

• Mengning Liu, Southeast University