Costello College of Business Faculty Research

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George Mason marketing professor receives prestigious research funding

Katelynn C Hipolito — Wed, 08 Oct 2025 14:56:59 +0000

George Mason marketing professor receives prestigious research funding Katelynn C Hipolito Wed, 10/08/2025 - 10:56

Jessica Hoppner

Jessica Hoppner, associate professor of marketing at the Donald G. Costello College of Business at ��, has been named a recipient of Academy of Marketing Research Funding for 2025.

According to the submitted proposal, the awarded project—entitled “Bridging the Digital Divide: The Paradox of Sales and Marketing Collaboration on Social Media”—“will contribute to both academic research and industry best practices, guiding B2B firms toward more effective digital engagement strategies.”

The Academy of Marketing’s research sub-committee chooses a mere handful of recipients each year for grants of up to £5,000. Funding is offered in collaboration with Marketing Trust, an independent charity dedicated to supporting marketing projects serving the public good.

Hoppner’s co-PI on this project is Severina Cartwright, senior lecturer (associate professor) in marketing at University of Liverpool.

Hoppner and Cartwright plan to use the grant money to carry out an in-depth practitioner survey leading to the creation of a unique and granular data-set. Anticipated final output will include an academic article submitted to a top marketing journal, as well as a whitepaper and other translational content for a practitioner audience.

As per the proposal, the project will unfold in three phases: survey development and pre-testing, data collection and analysis, and dissemination and knowledge transfer. Hoppner and Cartwright aim to complete their project within a twelve-month timeframe.

Saurabh Mishra

“Congratulations to Prof. Hoppner on this well-deserved funding award—an achievement that underscores the excellence of her work and exemplifies the innovative and managerially meaningful research being conducted within the marketing area in Costello.”

— Saurabh Mishra, marketing area chair

In This Story

Jessica Hoppner

Saurabh Mishra

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Marketing - Costello

Marketing Area

Costello Research SEC/PCAOB

Faculty and Staff News

‘Nothing to see here’: How corporate spin confuses Wall Street

Katelynn C Hipolito — Wed, 08 Oct 2025 14:38:35 +0000

‘Nothing to see here’: How corporate spin confuses Wall Street Katelynn C Hipolito Wed, 10/08/2025 - 10:38

Managers’ attempts to distract investors from bad news have serious implications for market efficiency.

Public-relations professionals call it “getting ahead of the story”—feeding positive spin to the media to blunt the impact of unflattering news to come. Celebrities engage in it; so do companies when, for example, their forthcoming earnings report is destined to disappoint. But do these face-saving distraction tactics affect the long-term movement of share prices?

Min Shen, associate professor of accounting at Costello College of Business at ��, recently published a paper in The Accounting Review suggesting that traders see through these pre-emptive disclosures of positive news, and change their info-seeking behavior accordingly.

Shen’s co-authors were Edward Xuejun Li of Baruch College, K. Ramesh of Rice University, and Joanna Shuang Wu of University of Rochester.

The researchers analyzed share price movements surrounding corporate and non-corporate disclosures between January 2003 and March 2016 (35,330 firm-year observations in their sample). Corporate disclosures included earnings announcements, management guidance, press releases, SEC filings, etc. Non-corporate disclosures come from intermediaries such as analysts, credit rating agencies and journalistic outlets.

Splitting the firm-years into “good” and “bad” years based on stock performance, the researchers uncovered a striking discrepancy. During a bad year (i.e. when a company was underperforming relative to peers), the market’s immediate response to corporate disclosures had much less of a lingering effect, accounting for a mere 40 percent of price discovery over the course of the year. The equivalent figure for good years was around 60 percent.

Shen stresses that corporate disclosures were no less frequent during bad years, but they were seen as less informative. Press releases were one of the main drivers of the disparity: Their contribution to price discovery fell from an average of 27 percent during good years, to three percent in bad times.

Min Shen. Photo by Costello Marketing and Communications.

“A company might rush a press release announcing a new AI model, or a new five-year contract with the government, in anticipation of an upcoming adverse disclosure,” Shen says. “And for bad news, they try to delay it as much as possible, until they are forced to disclose in mandatory SEC filings.”

This gap was basically unaffected by the 2008 global financial crisis. “We picked 2009 as the cut-off year, and compared pre-crisis to post-crisis,” Shen says. “In the post-crisis period, we find management teams became somewhat more cautious and less inclined to withhold bad news. So the gap between good-news and bad-news years narrowed a bit, but the main findings still hold.”

So if official disclosures from underperforming companies became less influential, where was the market getting its information during bad years? In the absence of reliable public disclosures, investors intensified their search for private information. The price-setting power of so-called “extreme order imbalances”—incidents of severely lopsided supply and demand that are often triggered by private information-sharing—was greater during bad years.

Moreover, by sharing what they know, outside monitors such as short sellers, equity analysts, and dedicated long-term institutional investors can put pressure on managers to be more transparent about bad news. Shen and her co-authors found that more stringent external monitoring by these market participants was associated with faster disclosure of bad news. When managers see that the news they are trying to bury is leaking out anyway through other channels, they may conclude that there’s nothing to be gained by continuing the cover-up.

Shen says her paper calls attention to how conflicting managerial incentives shape disclosure. “Managers are driven by compensation and job security incentives, which are pegged to benchmarks such as target share price or debt-to-equity ratio. That’s why they disclose good news as fast as possible, and try to hide bad news.”

But managers’ attempts to control the narrative are bounded by government regulations (e.g. SEC reporting requirements) and the company’s risk of a shareholder lawsuit that may follow a sudden decline in share price. Therefore, Shen suggests that policymakers could consider playing a more active role.

“SEC filings are quite significant for price discovery during bad years and insignificant during good years,” Shen says. “Mandatory disclosure brings bad news to light faster, because management faces more severe penalties and heightened litigation risk if they insist on burying it.”

In This Story

Min Shen

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Accounting - Costello

Costello Research Non-Financial Disclosure

Costello Research Asset Pricing & Valuation

Costello Research Market Efficiency

Accounting Area

Costello College of Business welcomes eight new research-focused faculty

Katelynn C Hipolito — Mon, 29 Sep 2025 19:31:43 +0000

Costello College of Business welcomes eight new research-focused faculty Katelynn C Hipolito Mon, 09/29/2025 - 15:31

Meet the newest Costello researchers, and become acquainted with their scholarly profiles.

For the 2025-26 academic year, Costello College of Business at �� welcomes an illustrious cohort of eight new research-focused faculty members. Their research profiles below typify the seamless integration of scholarly rigor and impactful relevance for which the Costello faculty is already well-known.

Associate Professors

Stephen A. Karolyi

Stephen A. Karolyi

Associate Professor, Finance

Stephen comes to Costello from a stint as senior economic advisor of the Office of the Comptroller of the Currency, U.S. Department of the Treasury. Prior to that, he served as assistant professor of finance and accounting at Carnegie Mellon and received his PhD from Yale University.

He has published widely in top-tier academic journals on topics including banking, financial intermediation and corporate finance. His recent work draws upon his regulatory experience to explore questions of direct policymaking relevance. For example, his co-authored paper in Journal of Finance uses the banking industry as a test case to show how competition may affect short-termism among publicly listed firms.

Min Shen

Min Shen

Associate Professor, Accounting

Min returns to ��’s accounting faculty as the Phillip G. Buchanan Endowed Fellow after holding an associate professorship of accounting at Baruch College.

Min’s research on corporate disclosures, capital markets and information dissemination has been published in top-tier journals. Her recently published co-authored paper in The Accounting Review finds that the impact of corporate disclosures upon price discovery varies greatly with the financial performance of the company concerned in a given year. Min received her PhD from Michigan State University.

Mengxin Zhao

Mengxin Zhao

Associate Professor, Finance

Prior to joining Costello, Mengxin served as a senior financial economist at the U.S. Securities and Exchange Commission and was an associate professor of finance at the University of Alberta. Her research has three overlapping themes: corporate governance, international finance and capital market frictions. Mengxin’s 2022 co-authored paper in The Review of Corporate Finance Studies challenges standard explanations of how equity market liberalization leads to growth in emerging economies.

Her scholarship has been recognized by the Pearson/Prentice Hall best paper competition and the European Corporate Governance Institute’s Standard Life Investment Best Paper Award, among others. She received her PhD from the University of Pittsburgh.

Assistant Professors

Qiaodan (Jordan) He

Qiaodan (Jordan) He

Assistant Professor, Information Systems and Operations Management

Qiaodan’s research focuses on the impact of artificial intelligence (AI), user behavior, and online platform strategies in mobile commerce and social media contexts. In a recent co-authored working paper, she analyses how aspects such as facial expressions and beauty filters affect engagement (“likes”) for online user-generated videos. She received her PhD from Lehigh University, where she also was awarded the Warren York Fellowship.

Chen Jing

Chen Jing

Assistant Professor, Marketing

Chen’s research examines the social impact of firms, as well as how innovative technologies like generative AI are reshaping business and society. For example, one of his co-authored working papers uses machine learning to assess firms’ attempts to mitigate negative sentiment on social media following sociopolitical crises. His PhD is from Boston University.

David S. Lucas

David S. Lucas

Assistant Professor, Management

David is a three-time �� alum, having received his bachelor’s, master’s and PhD from George Mason. He comes to Costello from Syracuse University, where he was the Edward Pettinella assistant professor of entrepreneurship.

He has published widely in top journals on topics ranging from entrepreneurship to public policy and grand societal challenges. His 2022 article in Academy of Management Journal was a finalist for the Responsible Research in Management Award.

Barbara Su

Barbara Su

Assistant Professor, Accounting

Barbara comes to Costello from Temple University, where she was assistant professor of accounting. Her research specialty areas include financial institutions and debt markets. For example, Barbara’s co-authored 2022 paper in Contemporary Accounting Research uncovered how bank deregulation fueled changes in borrowing firms’ compensation structures for top managers.

Prior to entering academia, she acquired professional experience as an analyst and financial auditor for Diageo, Bain & Company and General Electric in Beijing and London. She completed her PhD at University of Toronto.

Zhechao Yang

Zhechao Yang

Assistant Professor, Information Systems and Operations Management

Zhechao’s research interests include the economics of AI, social media, e-commerce retailing and design science. For example, her co-authored working paper finds that adding AI players to online video games boosts engagement and teamwork among human gamers. She has also published in Production and Operations Management. She received her PhD from University of Florida.

In This Story

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A.I. and Innovation - Costello

Faculty and Staff News

George Mason researcher is using AI to identify human trafficking hot spots

Katelynn C Hipolito — Mon, 29 Sep 2025 18:20:46 +0000

George Mason researcher is using AI to identify human trafficking hot spots Katelynn C Hipolito Mon, 09/29/2025 - 14:20

Illicit massage businesses (IMBs) run by human trafficking rings are rampant in the United States. A �� professor has helped build what may be the best artificial intelligence (AI)-driven tool to root them out.

Human trafficking rings are at their most dangerous when they masquerade as legitimate commercial activity. IMBs are one of the most common ways in which exploitive networks operate in plain sight.

The Network, an anti-trafficking nonprofit, estimates that there are more than 13,000 IMBs active in the United States, raking in annual total revenue of more than $5 billion.

Abhishek Ray

“You are stuck in a massage business. You’re not allowed to go out,” says Abhishek Ray, assistant professor of information systems and operations management at the Donald G. Costello College of Business at George Mason, describing the plight of IMB workers. “Your passports are taken away, and you’re supposed to do a certain amount of business every day and give the money to the trafficker. It’s a really abhorrent form of abuse.”

Ray is one of a growing group of researchers exploring how various forms of AI could help resource-constrained law enforcement agencies differentiate between IMBs and the legitimate enterprises they try to mimic. His ongoing research using graph neural networks has yielded more promising results than rival approaches, when put to the test in a recent experiment.

His co-researchers on the IMB project are Lumina Albert and Swetha Varadarajan of Colorado State University.

According to Ray, “Graph neural networks are just a fancy way of saying that if I get a graph of a city or locality at one point in time, and I add data to it, can I predict future patterns on this graph if I know the past?”

This approach made sense for detecting IMBs, because try as they might to appear above board, they have geographical needs that conventional businesses don’t. “IMBs don’t allow their trafficked employees to go out of the parlor,” Ray says. “But since they’re humans, they need sustenance. They have to be near groceries, gas stations, where they can get stuff and come back.”

The researchers combined several graph neural networks into a framework called IMBWatch. The training data-set for IMBWatch comprised publicly available information such as online customer reviews, arrest and raid data for known IMBs, and advertisements from websites promoting illicit activities (e.g., the infamous Backpage). The result, in essence, was a series of snapshots mapping the evolution of the IMB network in a given city or county over a period of time. This could then be overlaid on geographical maps to tease out hidden patterns.

To gauge IMBWatch’s relative performance, the researchers let it loose on a testing data-set alongside four other AI models, which were not as sensitive to the nuanced interplay of spatial and temporal factors. Of the five models, IMBWatch provided the most accurate, precise and informative predictions. In other words, it outperformed the others at spotting IMBs among a larger mass of local businesses.

While encouraging, these outcomes require further confirmation with a larger data-set. “IMBWatch was trained on data from Georgia and Louisiana, not the entire United States,” Ray says. “These were small, manageable data-sets, but we will now scale up to major states such as New York and California.”

The researchers are also looking at enhancing IMBWatch with data related to how workers end up wandering into trafficking webs. These might include “proximity to hospitals, religious places, etc. because a lot of times people are coerced by religious compulsions, or because they’re pregnant and need some care,” Ray says.

This is not Ray’s first foray into the field of AI-fueled anti-trafficking. Previously, Ray co-developed a model for improving machine learning-based detection of human trafficking activity at transit stations and on fishing vessels.

However, law enforcement agencies and other pertinent stakeholders (e.g., business owners) are often wary of adopting AI-based solutions, due to a lack of trust in the technology. Ray and his co-researchers are currently devising a framework that will clarify how these stakeholders can work together with tech experts and, perhaps most importantly, human trafficking survivors to make the best possible use of AI.

“This qualitative piece is required to make sure that people who are on the sidelines, on the fences about using this actually start using it, because that’s the need right now,” Ray says.

Learn more about Artificial Intelligence at George Mason

In This Story

Abhishek Ray

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Costello Research Artificial Intelligence

ESG - Costello

Artificial Intelligence

Costello Research Machine Learning

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Information Systems and Operations Management Area

Are there upsides to “overboarding”?

Nilesh Patel — Mon, 14 Jul 2025 17:13:26 +0000

Are there upsides to “overboarding”? Nilesh Patel Mon, 07/14/2025 - 13:13

How many board seats is too many for one director? That’s the question on many investors’ minds, as they confront the possibility of “overboarding”—directors being spread too thin to do their work effectively. BlackRock, for example, voted to oust one of Twitter’s board members in 2022 because he sat on the boards of six other companies.

However, new research from Sebahattin Demirkan, associate professor of accounting in the Costello College of Business at ��, suggests there may be upsides to board directors holding multiple seats at the same time. His paper in Asian Review of Accounting finds that deeply networked boards are more flexible and creative when it comes to a key competitive area: open-ended strategic alliances.

The paper’s co-authors are Robert Felix of The Catholic University of America and Nan Zhou of University of Cincinnati.

The researchers used a metric called “board centrality” to quantify the total social capital held by a company’s board of directors.

“Centralized directors are leaders who have been in the industry a long time,” says Demirkan. “They sit on multiple boards. And they are deeply connected within an industry, such as if Nvidia and Intel have a relationship and that person is working as a board member for both.”

The researchers used the SDC strategic alliances database to capture new alliances formed during the period 1998-2011. Their data-set comprised 18,412 firm-year observations.

First, they divided the alliances into joint ventures and incomplete contracts. Joint ventures, which involve setting up an entirely separate business entity, entail much less complexity and uncertainty than do contractual alliances, which by definition cannot account for all the surprising challenges that may lie ahead. The paper finds that centralized boards were more likely to embark upon both types of strategic alliances, but the effect was strongest for contractual alliances.

Demirkan stresses that the two types aren’t mutually exclusive; a contractual alliance can be a precursor to a successful joint venture. “I always use marriage as a comparison…Some cultures do arranged marriage because families know each other very well, because they were neighbours and so on and so forth. It’s trial and error but you don’t want to make too many errors because these arrangements may hurt your parent company business. That’s where board capital comes in. Centralized board members know which strategic alliances will work for this particular company.”

Further, centralized boards took on more strategic alliances when their CEOs were relatively new, underscoring boards’ customary advisory role. Similarly, diversified firms, which normally require more guidance from the board, saw a stronger relationship between board capital and propensity for strategic alliances. The same was true of firms with more intangible assets—in other words, innovative companies engaging in heavy R&D.

The researchers also looked into whether the enhanced alliance activity paid off for these firms. Their analysis confirmed that the special ability of centralized boards to form successful strategic alliances was associated with higher market performance, steadier returns and lower audit fees.

This strikes an interesting contrast with some of Demirkan’s earlier publications on similar topics. For example, a 2014 paper in Journal of Business Research found that firms with contractual alliances suffered from lower earnings quality, making them a riskier bet for investors. A 2016 paper in Contemporary Accounting Research linked contractual alliances to higher audit fees.

“The market doesn’t like companies with contractual alliances,” Demirkan says. “It discounts their stock prices, because the information environment is not good; it’s quite complex and the boundaries are not well defined.”

However, the new paper indicates that centralized boards act as a reassuring signal to capital markets that offsets some of the inherent risk of contractual alliances. “Boards with high social capital may manage this better, because they are much more knowledgeable,” Demirkan says. “They know which contractual alliances are good, and the market also trusts them to pick these alliances wisely.”

In This Story

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“Doing well by doing good”? There’s a framework for that

Jennifer Anzaldi — Wed, 02 Jul 2025 15:38:03 +0000

“Doing well by doing good”? There’s a framework for that Jennifer Anzaldi Wed, 07/02/2025 - 11:38

Today’s customers don’t just buy products—they buy into what a company stands for. It is no longer just low prices or flashy marketing that target the latest trends. Stakeholders are asking harder questions: Does this company treat its workers fairly? Are they harming the environment?

In a recent study published in the Journal of Brand Management, Russell Abratt, a marketing professor at the Costello College of Business at ��, tackles a key strategic challenge: How companies can move beyond shallow social and environmental messaging to meaningfully shift consumer perceptions. Joining Abratt on this research team are co-authors Emmanuel Silva Quaye of University of Witwatersrand and Nicola Kleyn of University of Pretoria.

Russell Abratt

When a brand is described as being true to themselves, holding values of fairness, a concern for society, and an obligation to goodness, it becomes what they call a conscientious corporate brand. These are brands who are trusted to do the right thing consistently and authentically.

But trust alone is not enough. Companies want to know: Does being conscientious also deliver better business outcomes?

Building on their 2023 work, which introduced a framework for developing conscientious corporate brands, the research team now offers empirical evidence that this framework not only enhances brand trust but also leads to the response companies are hoping for—responsible branding can drive tangible value.

“Firms in order to succeed these days really need to go beyond profits,” says Abratt. “You’ve got to be ethical in whatever you do. You’ve got to be socially aware. And you’ve also got to be very, very conscientious about what you are doing.”

To further investigate Abratt’s 2023 framework and understand what changes stakeholder perceptions, the researchers conducted two experiments with South African participants. Each participant was shown a scenario involving a fictional construction company: the control group highlighted traditional business goals such as efficiency and profitability, and the experimental group emphasized ethical leadership, social impact, and environmental sustainability. The results were striking.

“We saw very clearly the differences between the control group and the experimental group,” Abratt explains. Participants viewed the purpose-driven, socially engaged version of the company as significantly more conscientious, responsible, and authentic than the version focused purely on business efficiency.

Their research identified four elements in a chronological sequence that contribute to conscientious corporate branding: organizational purpose, brand authenticity, corporate social responsibility (CSR), and ethical organizational culture. These are not separate strategies; they reinforce each other.

The first element of this sequence is organizational purpose. A company must begin by defining why it exists beyond just profits. Next is authenticity. “Authenticity leads to trust,” says Abratt. “The more authentic that an organization is perceived to be, the more positive perceptions the stakeholders have.” The paper finds that authenticity acts as a bridge that connects an organization’s purpose to stakeholders’ perceptions of conscientious corporate branding.

Next is the third element: corporate social responsibility. This must be integrated, not performative. “Developing a corporate social responsibility strategy should be part of the organization’s overall strategy,” says Abratt. “It should not be seen as greenwashing, as added on and fake.”

Lastly, an ethical organizational culture is created by top leadership through example and prioritizing ethical values across the organization.

According to Abratt, “In order for a firm to say this is our purpose beyond profits, they’ve got to have a top leadership that says these are our values. This is what we stand for. Then that needs to be typicalized throughout the organization.”

So what does this mean for business leaders? It means that building a conscientious brand is no longer just a marketing strategy—it’s a business imperative. But the real challenge lies in making sure those sustainable actions resonate with consumers to ultimately result in success. Can companies do well by doing good?

Looking ahead, Abratt and his colleagues hope to expand their research to other industries and other countries or regions to test whether their results are generalizable to other contexts.

“Brands that have a purpose beyond profit are the ones that are going to be seen by stakeholders in a more positive light. And if they are seen in a more positive light, those stakeholders, especially customers, are likely to support that particular organization,” Abratt concludes.

In This Story

Russell Abratt

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Marketing - Costello

ESG - Costello

Costello Research Market Research

Costello Research Managing Change

Costello Research Competitive Strategy

Costello Research Retail

Marketing Faculty Research

Future of Work & Leadership - Costello

Operations - Costello

In the workplace, relationships equal reality

Nilesh Patel — Wed, 28 May 2025 15:18:36 +0000

In the workplace, relationships equal reality Nilesh Patel Wed, 05/28/2025 - 11:18

In This Story

Kevin Rockmann

Most managers measure success in outputs: bottom lines, quarterly gains, performance metrics, and incentives. But the forces that shape those outcomes are often invisible — rooted in relationships, communication, and how people support one another. Many management models overlook these dynamics, treating them as background noise rather than essential systems.

Kevin Rockmann, professor of management at �� and CGI corporate partner faculty fellow, argues that managers often lack a nuanced understanding of how employees actually work with and through one another, not just one-on-one with their supervisors.

“We're really trying to get both researchers and practitioners to think about relationships in a different way,” Rockmann says. “And really, the movement we're working on here is to think more broadly about what relationships do in organizations.’’

For example, Rockmann’s paper in Annual Review of Organizational Psychology and Organizational Behavior—co-authored by Caroline A. Bartel of the University of Texas—draws on established research concepts of Pipes and Prisms to help managers better understand the often-overlooked importance of interpersonal relationships at work.

The Pipes metaphor captures the channels through which the work gets done. They are conduits through which these central processes, like communication and coordination, keep the organization running smoothly.

“We can’t really understand organizational effectiveness unless we understand how relationships serve as pipes,” Rockmann says. “To extend the metaphor, managers need to ask if their pipes are clogged? Or whether the pipes are even there?”

This might occur, for example, when a new hire joins an organization and their relationship with an incumbent employee helps them navigate team dynamics, answers all their questions efficiently, and ultimately enables work to get done in a timely manner.

Rockmann’s research shows that leaders should move beyond focusing solely on their own one-on-one relationships with their subordinates and view how relationships function across teams or units of employees.

Rockmann says, “My relationship as a manager with my employees matters, but it also involves looking at the Pipes—how are people connected with one another? Is each person getting the support and the help that they need? How well are we communicating and working together as a unit? So, it’s not just about my relationships, but about the relationships of the people I’m managing.”

The Prisms metaphor builds on the idea that relationships don’t just get things done more efficiently and produce results—they also impact how subordinates interpret and respond to events and information. For example, when a manager communicates openly with their subordinates about challenges like limited resources or budget cuts, subordinates are more likely to respond with empathy, seeing the situation as a shared problem rather than a failure by their manager.

“This is why we're talking about relationships as a prism or as the most understudied contextual variable in organizations,” Rockmann says. “It’s untapped potential for not only researchers, but also practitioners to think about why things are working or why things aren't working.” Prisms are the next stage of evolution in sensemaking for managers to recognize how their employees interpret workplace policies or changes, depending not just on what they are told, but also by whom and how. However, most managers still struggle to manage the “pipes,” let alone the more nuanced dynamics of how information is interpreted and processed across teams.

Rockmann believes many managers overemphasize tangible incentives — like bonuses — and underestimate the importance of high-quality day-to-day relationships. Such relationships are a lens by which employees view everything in an organization: organizational changes, opportunities, technology, and so on. When the organization becomes a hub for relational support and positive relational interactions, so many other issues organizations face become easier.

So, what can managers do? Across his work, Rockmann emphasizes making the cultivating of relationships part of the job itself, fostering collaboration in the KPIs on which employees are evaluated. Infusing such criteria into job descriptions, hiring processes, socialization experiences, and evaluation systems are all ways company leaders and line managers can signal to their subordinates that interpersonal relationships truly matter. When infused in this way relationships become more of a strategic priority, not just a “nice to have” for the organization.

Topics

Costello Research Teams

Costello Research Recruiting

Costello Research Health & Well-being at Work

Costello Research Risk Management

Why it doesn’t—and shouldn’t—always pay to be a super-successful CEO

Jennifer Anzaldi — Wed, 07 May 2025 12:46:40 +0000

Why it doesn’t—and shouldn’t—always pay to be a super-successful CEO Jennifer Anzaldi Wed, 05/07/2025 - 08:46

In This Story

JK Aier

Are corporate boards acting as stabilizing forces for their firms, or enablers of extreme greed? That’s one of the questions implied by current debates about so-called “runaway CEO pay.” It’s not entirely clear how the CEO incentives set by the board can be squared with its fiduciary duty to safeguard long-term shareholder value. That’s largely due to the mystery surrounding how CEO compensation is determined in the first place.

“It’s a black box,” says JK Aier, senior associate dean for academic affairs and global engagement and associate professor of accounting at the Donald G. Costello College of Business at ��. “We don’t know why boards give bonuses, why CEOs get a raise—in other words, what goes on behind the scenes.”

JK Aier

Aier’s academic paper, forthcoming in Accounting and Business Research, circumvents this problem by focusing on cases posing stark contrasts between short- and long-term value. (Jian Cao of Florida Atlantic University, Zhanel DeVides of Penn State Abington and Ki Kyung Song of West Chester University co-authored.) When a company reports increased earnings year after year, a short-sighted board would raise CEO compensation in line with that performance, incentivizing the CEO to keep up the good work. To cooler heads, however, such a long “earnings string” would raise red flags, prompting a more cautious stance toward compensation.

“Continuous growth or expectations of continuous growth create adverse incentives and challenges because it’s not possible, given how business cycles work,” says Aier. “It may create undue pressure on CEOs to maintain growth somehow if it is strongly tied to compensation.” A strict pay-for-performance approach could induce CEOs to take risks that endanger long-term firm value, such as engaging in managerial manipulation. But how religiously do boards adhere to pay-for-performance?

The researchers examined earnings patterns and CEO compensation for thousands of firms during the period 1999-2018 (11,197 firm-year observations in all). About two-thirds of the firm-years saw an increase in earnings; of those, fewer than 20 percent were in their sixth year or later in an unbroken earnings string.

Across the sample, CEO compensation over time was responsive to earnings patterns. For the first few years of the string, boards lavished their outperforming CEOs with expanding pay packets. But rewards tapered off in subsequent years, indicating that boards may be aware of the risks of over-incentivizing long patterns of increased earnings.

A similar relationship existed for firms with negative earnings strings. After sharply reducing compensation in the first two years of losses, boards stopped penalizing struggling CEOs and kept compensation fairly flat.

“If a company continues to have losses, will directors keep penalizing the CEO? If they do, no one will want to work for that company,” Aier says. “Instead, giving CEOs a runway during a string of continuous losses provides them the opportunity to turn things around.”

The researchers also looked at the probability of CEO turnover as it related to earnings patterns. Surprisingly, CEOs who presided over uncommonly long upward strings faced increased odds of turnover, which Aier attributes in part to board suspicions. “On the profit side, there seems to be a loss of trust that this is even possible,” he says. “Boards are willing to look at changing the CEO because they believe these strings may be unsustainable. In other words, something smells fishy to them.”

The opposite dynamic held true for poorly performing firms. CEO turnover risk declined over the longer downward strings, presumably reflecting broader concerns about retaining talent during prolonged periods of financial difficulty.

In sum, board compensation committees seem highly attentive to earnings patterns, monitoring them for long-term risks and adjusting CEO pay packets accordingly. This cuts against the idea that directors may be complicit in a CEO money grab that imperils firms’ long-term standing.

Moreover, the researchers found that the above-mentioned relationship between earnings patterns and CEO compensation was much stronger for firms experiencing lower competition and higher earnings persistence. This suggests that where market discipline is lacking, directors will pay even closer attention to earnings strings in order to keep CEOs honest.

“Our research suggests that boards pay attention to their monitoring role,” Aier concludes. “Boards are proactive; they care not only about whether the company is doing well, but also how performance is achieved.”

Hedging long-term risks by changing CEO compensation is one way directors can prevent misaligned incentives from forming. “The board’s role goes beyond making sure things go smoothly. It is also looking into the future in terms of what’s needed for the company and its stakeholders, and making sure the operations and the management of the company are also looking at performance from that perspective,” Aier says.

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Accounting - Costello

Strategy - Costello

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