A little over a year ago, I decided that my career goal was to become a business-school professor. I’ve been lucky enough to be admitted to several great business-school doctoral programs, and, this past week, I’ve been traveling to visit some of the schools. One common theme in my conversations with my fellow admits and the current grad students is that we have trouble explaining to outsiders what our research interests are and why they count as a part of a business-school PhD in subfields like marketing, or accounting, or management. Like many fields, we have our own private semantics, and we’re not always so good at translating it for outsiders. This is hardly unique to business schools: Anymore, some dissertations in economics might strike outsiders as looking like straight mathematics, and many dissertations in political science are what regular people might identify as economics or game theory. So I thought I’d use what I learned and write a quick blog post about what business-school professors do, with a particular focus on what business-school accounting professors do, for the sake of curious and confused Googlers.
Most business school faculty and their associated doctoral programs are organized into several units, which might include Management, Organizational Behavior, Accounting, Strategy, Finance, Marketing, and maybe some others. But these names could give outsiders the wrong impression of what the faculty inside these units actually do. ‘Marketing’ professors and journals don’t typically study, say, whether 30-second or 60-second TV spots are more effective. Instead, they publish rigorous social science about human behavior and psychology that is, typically, more abstractly related to or adjacent to the things that firms’ marketing employees actually do–or sometimes, they publish on topics that are relevant to the academic debates and literatures those papers have generated. As such, all of the following might be broadly categorized as marketing research: the microeconomic theory of ‘optimal auctions’ (how to design auctions such that bidders reveal their true prices—one application would be stopping oligopolistic government contractors from implicitly colluding); the psychological bases of trust and attachment (one application of which might be how learning how preferences and ideas ‘diffuse’ through populations); or even the neurological bases of attentiveness (which might have applications for education as much as for TV advertisements).
Similarly, ‘management’ professors wouldn’t typically study, e.g., how to schedule staff hours at a local retailer, but might study regional economics and why firms tend to cluster in certain geographies. And ‘organizational behavior’ professors don’t just study social psychology within the firm, but might also look at families, the military, or digital communities like online forums, or even computer models of evolving group behaviors. Even ‘finance’ tends to be broader and more abstract than outsiders expect. In other words, most of these fields are broader than you would likely expect, and can be thought of, I think, as subfields of economics (or in the case of organizational behavior and certain parts of management and strategy, subfields of psychology), that are related to, but not totally constrained by, the associated real-world business functions.
Now, some may read that criticize business academe for being impractical, but the counterargument is that the private sector already gives private-sector researchers very strong incentives to research the very immediately practical questions, and so academe can add value by stepping back to more abstract questions, to shore up the clarity, precision, empirical rigor, and theoretical basis of our ideas. The continued, outsized demand for expensive executive education courses, and business-school professors’ consulting fees, are evidence that business practitioners see some benefit in the perspective that this brings.
Let me go into more detail about the unit that I know the most about: What are the things that people in the ‘accounting’ units at business schools do? Well, to adapt a joke about economics, accounting research is what accounting researchers do, and accounting researchers are people who do accounting research. But one way of thinking about what counts as ‘accounting research’ in academe is that ‘accounting research’ is the subfield of economics that deals with the ‘accounting’ and ‘accountability’ functions within firms, but doesn’t limit itself to the actual process of bookkeeping. (Just as marketing deals with topics adjacent to sales an advertisement, but doesn’t limit itself to studying TV commercials, etc.)
‘Accounting’ refers to the financial information that firms produce (the legally required financial accounting in quarterly reports, as well as the managerial accounting used to make decisions internally, as well as more informal disclosures such as investor presentations and earnings calls). As such, some describe accounting research as a subfield of information economics. Research in this area includes the following: (A) The game theory of how firms decide what information to disclose given their conflicting goals of (i.) giving investors enough credible information so that they can get financing on good terms, (ii.) keeping trade and strategic secrets away from prospective competitors, and (iii.) not losing access to capital due to overreactions to short-term negative news—a complicated optimization problem. (B) The relationship between firms’ earnings numbers and their asset (stock and debt) valuations. (C) Assessing the performance of doctors in hospitals (given that it would be naïve to simply measure their patients’ outcomes, as this would reward doctors for choosing patients in less-dire straights). (D) How analysts assess municipalities’ finances and, thus, how city governments become cash constrained. (E) Corporate finance, e.g., how firms can issue more equity to raise cash for investments, without thereby signaling to investors that their shares are overvalued. All of these topics could be considered accounting in a broad sense because they deal with information and performance measurement.
‘Accountability’ refers to the allocation of decision and control rights within the firm, as well as how the individuals/groups who have been allocated those responsibilities are subsequently assessed and rewarded (‘held accountable’). Research in this area includes the following: (A) Corporate governance—everything about how the owners (shareholders) of firms control the management—including the role and effects of activist investors and the characteristics of successful directors. (B) Executive compensation and pay/incentive packages more broadly. (C) Mergers and acquisitions, which are fundamentally just changes in control/accountability. (D) White collar crime and corporate scandals. and (E) Corporate finance, e.g., how debt holders and equity owners fight over the riskiness of the firm’s capital structure, or how private-equity owners use debt-financing as a way to ‘discipline’ their businesses into running tight ships. All of these topics fall broadly within theoretical questions of accountability and control.
So, what is the value-add of business-schools’ accounting research? What does it have that isn’t already being done in regular college economics departments? Well, I actually think there’s a different answer for every individual topic I listed above, but let me focus on one of the biggest questions in accounting research, and the topic that launched the field—financial valuation. Now, from the perspective of basic financial theory, a financial asset (like a stock) is a vehicle for transforming cash today into cash tomorrow. Therefore, valuing a financial asset (that is, deciding how much cash today it is worth) is simply a question of projecting how much cash it will return to you in the future, and discounting each future cash flow by a number that translates that future money into today’s terms—that is, the discount rate rate—and then adding them all up. You can think of that discount rate as consisting of two parts: The first is driven by how much we humans prefer money today to money a year from now, or, alternatively, as the rate of return of completely risk-free alternative investments such as Treasuries. Second, given that the world is uncertain, you also have to think about the probability distributions of those future cash flows, as well as how worried you are about losing how much of your wealth—that is, risk and risk preferences. So financial theory says that only three things matter in valuing assets—and thus, by extension, in setting prices, which are the basis of everything else in the economy—(i.) cash, (ii.) the risk-free rate, and (iii.) risk.
Given this, under one view, firms’ accounting numbers, as opposed to actual realized cash flows, ought to be irrelevant. This is because audited accounting financial statements (such as those that you see in companies’ annual reports) hinge on artificial, man-made, abstract concepts, including accruals, amortization and depreciation, rather than purely reporting actual cash flows. E.g., historically, under U.S. GAAP, you may have had to depreciate the expense of a building even if it was in fine condition and located in an area that had become more popular such that it’s true value had only increased. GAAP earnings incorporate these fake expenses that don’t actually exist; thus, they are deceptive about what actually matters, namely cash. Under this view, while accounting information might have had a legal function, in preventing managers from deceiving the public, it did not have an economic/financial function in setting prices and valuations and efficiently allocating capital.
The paper that launched the field of academic accounting research, An Empirical Evaluation of Accounting Income Numbers (Ball and Brown 1968), however, found just the opposite, that accounting numbers drove market valuations. And a wealth of research since then has found the same, that the ‘artificial’ accounting numbers are relevant to understanding firms’ financial value.
Now, I do not–before I have even started my doctoral program–wish to dare to try to summarize the whole field of accounting research or do a systematic literature review. But let me try to convey my sense of the major takeaways, of why, exactly, this might be the case. Now, nobody doubts that cash flows are what really matters–the fundamental identity of finance, that present value equals discounted future cash flows, still holds. But accounting numbers might help us get at those cash flows better, through their indirect path.
Let me draw a parallel to heuristics in the evolutionary use of the term. We could metaphorically think of our genes as fundamentally ‘wanting’ to survive and reproduce, given that survival and reproduction are what have selected and passed down these genes over billions of years. But that doesn’t mean that the genes that influence our brains tell us “survive and reproduce,” and then let us figure out the rest. Instead, our genes give us a set of desires which happen to have maximized our chances of survival and reproduction in our evolutionary history, but which we do not read as such. In other words, they achieve their goal obliquely. These desires are heuristic goals in that they are not the goal itself (from our genes’ perspectives), but rather are rules-of-thumb that tended to produce evolutionary ‘success’ better than orienting us toward the goal itself would.
In the same vein, every investor’s goal in buying a financial asset is to transform cash today into cash tomorrow, but s/he may be more likely to achieve that goal by focusing on accounting-numbers heuristics, rather than by trying to make a complicated and uncertain cash-flow projection. This is arguably the case because accounting standards have been produced by a historical, evolutionary process, of small adjustments and changes being made as-needed, at the suggestion of experienced practitioners. As such, accounting standards embody a lot of historical intelligence that’s hard to reproduce through just looking directly at cash flows. In this vein, accounting numbers do not represent the truth about a firm, but, rather, the best simplification of the truth that we imperfect humans can work with.
To be clear, I haven’t come close to summarizing the breadth of the field. I’ve only described a few questions I’ve gotten the flavor of, to give a sense of the breadth and abstraction of the field, to others.
There are a few other things that I think are attractive about working as a business-school academic, particularly in accounting. First, today’s accounting academics get great training in economic theory and empirical methods, but they’re also rewarded for having institutional knowledge, about things like corporate law, contracts, the internal mechanics of firms and their transactions, and the things that go into the numbers that we statistically analyze. A pure economist and an accounting academic could both prove the Modigliani-Miller theorem (that equity and debt financing are equally costly to firms in equilibrium absent tax biases), but the accounting academic may be required to have more knowledge about how, say, how interest payments are accounted for in tax law, and how these things affect financing decision in reality. Second, business-school professors tend to engage with experienced students and real-world practitioners, through MBA, executive education, and consulting. As such, they tend to be a little bit closer to the ‘practice’ end, along the spectrum from pure theory to pure practice. They’re at a point in that spectrum that I like and one that, I think, produces valuable insight and knowledge. (But t his is just my preference, and I do respect my pure-economist friends who have a preference for more abstraction and pure equilibrium theory.)
So the TL;DR version of this blog post is that business-school professors do some of the most exciting and interesting social-science research around today, while still being able to engage with the real world and enjoy very strong career options. I think it’s wise for young scholars to consider doing their doctoral work through a business school.