Literature Review - Agency Theory
Motivation:
Practical Motivation
• It has been argued that we are at a tipping point with regard to climate change (find reference).
• Organisations are the principal source of carbon emissions (reference).
• Organisations have the greatest potential for making the necessary changes to reduce carbon emissions (reference).
• Climate change brings significant risks for organisations (reference) and therefore the value of shareholders' investment (reference).Some previous research has found links between environmental performance and share price (reference).
• Performance evaluation and reward are the mechanisms through which the shareholders' interests are protected (reference). Including targets and performance-based incentives (reference).
• Setting targets is difficult because there is not much experience in the management of emissions (reference, or lack or reference if that is the case).
Theoretical Motivation
• The effects of targets and incentives have been studied extensively in the context of financial performance (reference) but not non-financial performance (reference). There have been calls for more research on the operation of targets for non-financial performance (references)
• Understanding the effects of targets for environmental performance is particularly interesting because of information asymmetry regarding environmental performance (my idea). It is a relatively new area of strategic importance for many firms (reference that supports my argument).
• Previous research has found that challenging targets lead to increased target completion (reference) but no previous studies have considered the factors that explain the choice of difficult or easy targets related to environmental performance (I need to keep looking for this, have not found anything yet.).
• To be effective, targets should be difficult but achievable (reference, could be to a textbook).
• Previous research has not considered the extent to which managers build slack into the setting of environmental performance targets.
Literature Review and Hypothesis Development
Base theory - Agency Theory
• Seminal Articles
o Separation of ownership and control (reference),
o Agency costs of Monitoring, Bonding and Residual Loss (Reference)
o Setting targets and linking incentives to performance (reference) are important ways to bond an agent's behaviour to the interests of the principal (reference).
o In the presence of information asymmetry agents have an incentive to create slack in their targets (reference).
• Theoretical Constructs and operational proxies
o Slack (Dependent Variable)
Previous research has considered the budgetary process and the incentives of managers to set easy targets to:
- Increase their remuneration
- Decrease the required effort
- Be able to achieve the target even if unexpected factors arise.
- Need to find out how slack has been operationalised in the budgetary slack literature and apply it to the carbon emissions. Perhaps the budget difficulty relative to the industry average or extent to which targets are achieved.
o Information Asymmetry (Independent Variable)
- Information asymmetry decreases over time. Measured as the number of previous years that the organisation has been setting targets for carbon emissions.
• Relationships between proxies
- Previous research
• Find that challenging targets lead to greater target completion (reference), but that performance based incentives moderatethe effect (reference).
• The manager has a better understanding of possible potential performance than does the shareholder/ investor.
• When there is information asymmetry and performance-based incentives, managers have an incentive to create slack in their targets (reference).
• Predict that when information asymmetry is high (low) target slack will be high(low).
• Performance based incentives will increase the pressure to create target slack.
Hypothesis 1: Target slack will be greater in the first year in which targets are set.
Hypothesis 2: Target slack will be greater in the presence of performance based incentives.
Literature Review - Legitimacy Theory
Motivation:
Practical Motivation
• It has been argued that we are at a tipping point with regard to climate change (find reference).
• Organisations are the principal source of carbon emissions (reference). Organisations have the greatest potential for making the necessary changes to reduce carbon emissions (reference).
• Societal concern for the environment has escalated (reference)
• Government regulation regarding carbon emissions is increasing (regulation).
• Organisations are under increasing pressure to demonstrate their commitment to minimising their contribution to climate change to avoid further increases in regulation (reference).
Theoretical Motivation
• Previous legitimacy theory research has focussed on voluntary disclosure (e.g., reference)
• Conflicting research on whether firms are more likely to voluntarily disclose when their performance is good, or bad (reference).
• Previous research has not considered the targets (reference, or the fact that no references can be found).
Literature Review and Hypothesis Development
Base theory - Legitimacy Theory
• Seminal Articles
o Social Contracts (reference)
o Legitimacy and responses (reference)
o Responses to legitimacy problem (reference)
- change attitudes about what is acceptable (set low targets)
- change behaviour and communicate the improved performance. Set challenging targets
- draw attention away from the poor performance by highlighting something else. Firms, or firms in industries, facing a legitimacy crisis from some other cause use CDP disclosure to try to distract attention (consider Nike, Oil and Gas Industry...)Setting targets as a way to demonstrate commitment (reference if it can be found or create argument)
• Theoretical Constructs and operational proxies
o Voluntary Reduction Target (Dependent Variable)
- Target disclosed in CDP
o Legitimacy problem or crisis (Independent Variable)
- Environmentally damaging industries identified by (reference) or industries with high levels of carbon emissions
o Societal Concern (moderating variable)
- Survey of concern about climate change score for the country in which the firm operates.
• Relationships between proxies
o When faced with a legitimacy problem organisations with good performance will seek to communicate that performance (set challenging targets). Firms with bad performance will seek to change attitudes about what is acceptable (set low targets).
Literature Review - Summary
A logical set of arguments that builds understanding of the theory and issues, the theoretical constructs and how you plan to operationalise them, and convinces the reader of the prediction expressed in the hypothesis. Put in references wherever possible. If you do not have a reference for an important logical point, include the point but note that references being sought.
Motivation:
Practical
Introduce importance of the dependent variable
Climate change a big issue for various stakeholders, and this has flowed through to organisations.
Target setting is fundamental to the issues at National level. Flows through to firm level.
Theoretical
Gaps in previous research: "We know little about ...target setting ...superior environmental performance."
Target setting for environmental targets is different to target setting for financial performance - the results of the financial target setting may not apply to environmental performance.
Conflicting previous results
Finding new ways to test the theoretical constructs (ie new proxy measure)
Assigned Theory
Seminal articles
Overview of key aspects of the theory
Key theoretical constructs
Dependent Variable and it's related theoretical construct. Any previous research that has operationalised this theoretical construct in this way, or argument for why you will operationalise it with that measure.
Independent Variable and it's related theoretical construct. Any previous research that has operationalised this theoretical construct in this way, or argument for why you will operationalise it with that measure.
The argument for the relationship between the IV and DV.
Mention another variable that you will consider in your model and why (usually based on previous research that has included the measure as a control, moderating, or mediating variable. If a moderating or mediating variable you will provide more extensive explanation for the proposed relationship and may include a hypothesis to reflect that effect of that variable.
Conceptual Model:
Provide a diagram to show the relationships between the key theoretical constructs.
Hypotheses
Include draft hypotheses that you can continue to refine and which will be assessed in ACC620
Research Method:
Describe the research method that you will employ to test your hypotheses. Describe the sample and any important issues in regard to research method.
Your research question may relate to voluntary disclosure or some aspect of Greenhouse Gas performance (such as a reduction in emissions).
Attachment:- Research Proposal Marking Rubric and Template.rar