Essays on organizational ambidexterity, financial reporting quality, and investment efficiency

Abstract

Organizational ambidexterity is a corporate strategy where a firm simultaneously seeks to pursue exploration and exploitation (March, 1991). Despite being described as one of the most interesting subjects in strategy research (O’Reilly & Tushman, 2013), accounting and finance scholars have not yet extensively explored this topic. In accounting, studies on organizational strategy have looked at the effects of exploitation and exploration on financial reporting quality (Bentley, Omer, & Sharp, 2013; Hsieh, Ma, and Novoselov, 2019), audit quality (Bentley et al., 2013; Bentley-Goode, Newton, & Thompson, 2017), and tax accounting (Higgins, Omer, & Phillips, 2015). But none of the studies have analyzed the impact of ambidexterity on accounting outcomes. Similarly, on the finance end, studies have looked at how ambidexterity affects firm performance (Fu & Morris, 2014; Han & Celly, 2008; Hill & Birkinshaw, 2014; Lubatkin, Simsek, Ling, & Veiga, 2006; Stubner, Blarr, Brands, & Wulf, 2012; Uotila, Maula, Keil, & Zahra, 2009) but there has not been any work that explains how ambidexterity relates to better financial performance. Contributing to the aforementioned literature and filling the highlighted gaps, this dissertation seeks to answer two research questions. First, does organizational ambidexterity affect financial reporting quality? Second, does organizational ambidexterity affect investment efficiency? The dissertation consists of two papers, each answering one of the research questions. The first paper addresses the relationship between ambidexterity and financial reporting quality. The paper hypothesizes that ambidextrous firms reduce agency problems, have better performance, and are less risky, and thus will engage in less accounting manipulation and have higher financial reporting quality. The study used machine learning to measure ambidexterity (Bonsall, Mammadov, & Vakilzadeh, 2021; K. Li et al., 2020) and the discretionary accrual method to measure financial reporting quality (Kothari, Leone, & Wasley 2005). The study found a positive and significant relationship between ambidexterity and high financial reporting quality. The paper introduces March’s (1991) organizational strategy typology into accounting research and extends current accounting and strategy research by showing ambidexterity impacts accounting outcomes. The second paper addresses the relationship between ambidexterity and investment efficiency. Specifically, the paper highlights how ambidexterity relates to better performance by analyzing investment efficiency between ambidextrous and non-ambidextrous firms. The second study also used machine learning to measure ambidexterity (Bonsall et al., 2021; K. Li et al., 2020). Following Benlemlih and Bitar (2018), Biddle, Hilary, and Verdi (2009), and S. Chen, Sun, Tang, and Wu, (2011), the study measured investment efficiency using the deviation from the expected investment levels approach. The study found that ambidextrous firms show the least amount of deviation from ideal investment levels and thus have better investment efficiency. The findings contribute to the literature by showing how ambidexterity leads to better performance. In additional analyses, the study found that ambidexterity specifically leads to better investment efficiency by reducing overinvestment. The findings have implications for practice as they provide guidance on what managers and consultants should consider when deciding firm strategy.