REVISION: CEO and Board Chair Roles: To Split or Not to Split
Date Posted: Jan 29, 2010
We document that firms that are larger, have stronger governance and more able CEOs are more likely to combine CEO and board chair roles (i.e., duality). We also document that firms that split these roles have significantly lower announcement and post-announcement returns, and lower contributions of investments to shareholder wealth. This result is more pronounced for firms that split due to investor pressure, and performance outcomes are more negative for firms with higher predicted values of d
New: Audit Committee Compensation and the Demand for Monitoring of the Financial Reporting Process
Date Posted: Aug 29, 2009
We examine the relation between audit committee compensation and the demand for monitoring of the financial reporting process. We find that total compensation and cash retainers paid to audit committees are positively correlated with audit fees and the impact of the Sarbanes-Oxley Act, our proxies for the demand for monitoring. Our results are robust to the inclusion of audit committee quality, measured as the committee chair financial expertise. Our results suggest a recent willingness by fi
Debt-Equity Hybrids
Date Posted: Feb 18, 2009
This paper examines debt-equity hybrid securities whose existence and popularity appear to be due to their favorable accounting and tax treatment. Marketed under names such as Monthly Income Preferred Securities (MIPS), these securities are treated as equity-like for financial reporting and regulatory purposes, yet are treated as debt for tax purposes. In the four years since their creation, MIPS have largely replaced traditional preferred stock as a source of new capital, and many firms have en
Discussion of Does the Market Value Financial Expertise on Audit Committees of Boards of Directors?
Date Posted: May 08, 2006
No abstract available.
The Sarbanes-Oxley Act and Firms' Going-Private Decisions
Date Posted: May 28, 2004
We investigate firms' going-private decisions in response to the passage of the Sarbanes-Oxley Act of 2002 (SOX). The Act has the potential to bring both benefits, in terms of more transparent disclosure and improvements in corporate governance, and costs, in terms of complying with the new regulation. We argue that firms go private in response to SOX only if the SOX-imposed costs to the firm exceed the SOX-induced benefits to shareholders, and this difference swamps the net benefit of being a p
CEO Turnover and Properties of Accounting Information
Date Posted: Mar 03, 2004
Multiple-performance-measure agency models predict that optimal contracts should place greater reliance on performance measures that are more precise and more sensitive to the agent's effort. We apply these predictions to CEO retention decisions. First, we develop an agency model to motivate proxies for signal and noise in firm-level performance measures. We then document that accounting information appears to receive greater weight in turnover decisions when accounting-based measures are more p
CEO Turnover and Properties of Accounting Information
Date Posted: Dec 16, 2003
Multiple-performance-measure agency models predict that optimal contracts should place greater reliance on performance measures that are more precise and more sensitive to the agent's effort. We apply these predictions to CEO retention decisions. First, we develop an agency model to motivate proxies for signal and noise in firm-level performance measures. We then document that accounting information appears to receive greater weight in turnover decisions when accounting-based measures are more p
Debt-Equity Hybrid Securities
Date Posted: May 21, 2003
Trust preferred stock, first issued in 1993, was engineered to be treated as preferred stock for financial statement purposes and as debt for tax purposes (i.e., payments on trust preferred stock are deductible by the issuer). Our analyses exploit the features of trust preferred stock to shed light on three issues: 1) the extent to which firms incur costs to manage the balance sheet classification of a security; ii) the magnitude of tax benefits, if any, associated with leverage increasing capit
Debt-Equity Hybrid Securities
Date Posted: Jan 21, 2002
Trust preferred stock, first issued in 1993, was engineered to be treated as preferred stock for financial statement purposes and as debt for tax purposes (i.e., payments on trust preferred stock are deductible by the issuer). Our analyses exploit the features of trust preferred stock to shed light on three issues: 1) the extent to which firms incur costs to manage the balance sheet classification of a security; ii) the magnitude of tax benefits, if any, associated with leverage increasing capi
Incentives and Governance in Entrepreneurial Firms
Date Posted: Jun 18, 2001
This paper analyzes corporate governance decisions at firms making initial public offerings (IPOs) of common stock between 1996 and 1999. Our objective is to examine relationships between firms' corporate governance practices and the quality and availability of accounting- and market-based measures of firm performance. We collect a sample of 464 companies from the manufacturing, internet, and technology (non-internet) industries, and examine how CEO incentives vary with industry and with the ext
The Sensitivity of Corporate Governance Systems to
the Timeliness of Accounting Earnings
Date Posted: Oct 13, 2000
The purpose of this paper is to investigate how governance systems of large public U.S. corporations vary with information properties of numbers produced by their financial accounting systems. We argue that in firms whose current accounting numbers do a relatively poor job of capturing the effects of the firm's current activities and outcomes on shareholder value, the accounting numbers are less effective in the governance setting. We predict that such firms will substitute costly governance m
An Analysis of the Relation Between the Stewardship and Valuation Roles of Earnings
Date Posted: May 25, 2000
We develop an agency-based model that provides a direct theoretical connection between compensation-earnings sensitivities (CERCs) and value-earnings sensitivities (ERCs). The model predicts that CERCs are increasing in ERCs. This relation between valuation and stewardship derives from the fact that the capitalization rate of earnings into value also influences the marginal product of current period actions that impact current earnings. Our empirical tests of the model provide evidence of a posi
An Empirical Investigation of Trends in the Absolute and Relative Use of Earnings in Determining Cas...
Date Posted: Jan 06, 1999
The purpose of this paper is to provide evidence on whether there have been changes over time in the compensation-earnings relation. We investigate whether there is a trend during the period 1971-95 in the sensitivity of executive pay to reported earnings and in the importance of earnings relative to other information in explaining executive pay. As addressed in Gjesdal [1981] and in the model we develop, the relevance of a performance measure for valuing the firm may not be the same as its rele