Transparency Regulation and Organizational Design

Focusing on internal effects of transparency, Hofmann and Schwaiger use principal-agent, archival, and field studies to investigate the effects of transparency regulation on the firm’s organizational design and (within-firm) transparency. Building on the insights provided by A02 and incorporating externalities associated with a firm’s economic activities, B03 will examine the contracting and measurement implications when economic actors care for the firm’s externalities, how to manage externalities in a hierarchy of agents, and the interactions between externality-related norms, organizational design, and firm transparency. The theoretical findings of B03 will highlight a significantly underexplored real consequence of transparency. To test its theoretical predictions, B03 will coordinate with B04 to conduct a survey regarding the determinants of a firm’s organizational design, using the infrastructure of the German Business Panel (C01).

• Research Question

  How do firm’s environmental and social externalities shape the association between transparency regulation, organizational design, and (within) firm transparency?
  

• Research Motivation

  Organizational design comprises organizational structure (e.g., span of control), compensation contracts (e.g., pay-for-performance sensitivity), and performance monitoring (e.g., performance measure precision). We consider transparency regulation in two dimensions: disclosure (e.g., additional mandatory performance reports) and accuracy (e.g., more detailed segmental performance report). We consider the within firm or internal firm transparency for employees and the external firm transparency for market participants.

• Research Program

  The aim of the second funding period is to extend B03 by exploring how a firm’s externalities affect the association between transparency regulation and organizational design and, in turn, firm transparency. Externalities refer to the external effects of the firm’s activities, the costs of which are not fully internalized by the firm (e.g., a firm’s greenhouse gas emissions). Externalities have gained recent prominence, for example, due to concerns about firms’ environmental impact or the social impact along their supply chains. We view firm outcome as multi-dimensional (i.e., economic, environmental, and social outcome), suggesting that firm transparency may relate to any of these dimensions.

• Research Contribution

  We contribute to projects studying sustainability reporting and management and we complement B04 by highlighting how mandatory disclosures affect firms’ transparency regarding their ESG performance. We want to improve the understanding of how, in the presence of externalities implied by a firm’s activities, transparency regulation affects the firm’s organizational structure and performance monitoring, how organizational structure and performance monitoring collectively provide management incentives, and the consequences in terms of firm transparency.