Abbie J. Smith

REVISION: Financial Accounting Information and Corporate Governance
Date Posted:Mon, 17 May 2021 09:55:10 -0500
This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first review and analyze research on the use of financial accounting measures in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and suggest opportunities for expanding such research in the U.S. and abroad, including the consideration of interactions among control mechanisms. We also propose research to investigate more directly the effects of financial accounting information on economic performance through its role in governance and more generally using a cross-country approach.

New: Hedge Fund Activism in the Corporate Bond Market: Evidence from Bondholders’ Responses to Delay in Financial Reporting
Date Posted:Wed, 18 Apr 2018 07:48:49 -0500
We investigate hedge fund activism in the corporate bond market. The empirical setting we use is the active enforcement of bondholders’ rights during 2003-07 triggered by issuers’ violation of a standard bond covenant requiring timely financial reporting. Specifically, we examine differences in target company characteristics, strategic trading behavior, and subsequent outcomes between hedge-fund-involved and non-hedge-fund-involved interventions. We find that hedge-fund-involved interventions are more likely to target companies with higher levels of cash holdings, but less likely to target companies with a higher bankruptcy probability and greater amount of private debt outstanding. Meanwhile, the late filers in hedge-fund-involved interventions are more likely to have liquid bonds and their later filings are more likely to be predicted (e.g., triggered by option backdating investigations). The empirical evidence from strategic trading and market reactions suggests that ...

REVISION: Bank CEO Materialism: Risk Controls, Culture and Tail Risk
Date Posted:Mon, 04 Dec 2017 23:06:43 -0600
Focusing on a key CEO characteristic, materialism, we investigate how the prevalence of materialistic CEOs in the banking sector has evolved over time, and how risk management policies, the behavior of non-CEO executives and bank tail risk vary with CEO materialism. We document that the proportion of banks run by materialistic CEOs increased significantly from 1994 to 2004, coinciding with major bank deregulation. Using an index reflecting the strength of risk management functions (RMI), we find that RMI is significantly lower for banks with materialistic CEOs, and that RMI significantly decreases after a materialistic CEO succeeds a non-materialistic one and increases after a non-materialistic CEO replaces a materialistic CEO. Consistent with CEOs influencing corporate culture, we find that non-CEO executives in banks with materialistic CEOs more aggressively exploited inside trading opportunities around government intervention during the financial crisis. Finally, we find that ...

REVISION: Insider Trading Restrictions and Analysts' Incentives to Follow Firms
Date Posted:Thu, 07 Sep 2017 07:29:25 -0500
Motivated by extant finance theory predicting that insider trading crowds out private information acquisition by outside investors, we use analyst following data for 100 countries for the years 1987-1998, to study whether analyst following increases following adoption of or the initial enforcement of insider trading legislation. We document that both the intensity of analyst coverage (average number of analysts covering followed firms within a country) and breadth of coverage (the proportion of domestic listed firms followed by analysts) increase after initial enforcement of insider trading laws. We find that this increase is most prominent in emerging market and non-liberalized countries.

REVISION: Financial Accounting Information, Organizational Complexity and Corporate Governance Systems
Date Posted:Thu, 07 Sep 2017 07:25:50 -0500
We posit that limited transparency of firms’ operations to outside investors increases demands on governance systems to alleviate moral hazard problems. We investigate how ownership concentration, directors’ and executive’s incentives, and board structure vary with: 1) earnings timeliness, and 2) organizational complexity measured as geographic and/or product line diversification. We find that ownership concentration, directors’ and executives’ equity-based incentives, and outside directors’ reputations vary inversely with earnings timeliness, and that ownership concentration, and directors’ equity-based incentives increase with firm complexity. However, board size and the percentage of inside directors do not vary significantly with earnings timeliness or firm complexity.

REVISION: What Determines Corporate Transparency?
Date Posted:Thu, 07 Sep 2017 05:47:16 -0500
We investigate corporate transparency, defined as the availability of firm-specific information to those outside publicly traded firms. We conceptualize corporate transparency within a country as output from a multi-faceted system whose components collectively produce, gather, validate and disseminate information. We factor analyze a range of measures capturing countries’ firm-specific information environments, isolating two distinct factors. The first factor, interpreted as financial transparency, captures the intensity and timeliness of financial disclosures, and their interpretation and dissemination by analysts and the media. The second factor, interpreted as governance transparency, captures the intensity of governance disclosures used by outside investors to hold officers and directors accountable. We investigate whether these factors vary with countries’ legal/judicial regimes and political economies. Our main multivariate result is that the governance transparency factor is ...

REVISION: An Analysis of the Relation between the Stewardship and Valuation Roles of Earnings
Date Posted:Tue, 05 Sep 2017 12:37:21 -0500
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 positive link between CERCs and ERCs, persistence and other agency-based determinants of CERCs from our model. We also conduct an empirical investigation of the existence of secular trends over the 1971-1995 time period in CERCs and in the importance of earnings relative to other information in explaining CEO cash compensation. In contrast to recent studies documenting declining trends in ERCs, we find no general time trend in CERCs. We find, however, a decline in the importance of earnings in ...

REVISION: Bank CEO Materialism: Risk Controls, Culture and Tail Risk
Date Posted:Sun, 03 Sep 2017 00:51:29 -0500
We examine the extent to which bank CEOs exert influence on the corporate cultures of banking organizations by investigating how the prevalence of materialistic bank CEOs has evolved over time, and how observed risk management policies, the behavior of non-CEO executives and bank tail risk vary with bank CEO materialism. We document that between 1994 and 2004 the proportion of U.S. banks run by materialistic CEOs increased significantly in absolute terms and relative to non-financial firms, coinciding with significant bank deregulation. Using an index reflecting the strength of risk management functions (RMI), we find that RMI is significantly lower for banks with materialistic CEOs, significantly increases after a non-materialistic CEO replaces a materialistic CEO, and decreases after a materialistic CEO succeeds a non-materialistic one. We also provide evidence consistent with non-CEO executives in banks with materialistic CEOs more aggressively exploiting inside trading ...

New: CEO Materialism and Corporate Social Responsibility
Date Posted:Tue, 14 Jun 2016 05:46:10 -0500
We study the role of individual CEOs in explaining corporate social responsibility (CSR) scores. We show that CEO fixed-effects explain 63% of the variation in CSR scores, a significant portion of which is attributable to a CEO’s “materialism” (relatively high luxury asset ownership). Specifically, firms led by materialistic CEOs have lower CSR scores, and increases in CEOs’ materialism are associated with declining scores. Finally, CSR scores in firms with non-materialistic CEOs are positively associated with accounting profitability. In contrast, CSR scores in firms with materialistic CEOs are unrelated to profitability on average; however this association is decreasing in CEO power.

New: Executives’ Legal Records and Insider Trading Activities
Date Posted:Mon, 13 Jun 2016 08:46:16 -0500
We examine how and why insider trading varies across senior executives and their firms. As predicted, the profitability of both purchases and sales are higher for “recordholder” executives (those who have a record of legal infractions), than for other “non-recordholder” executives at the same firms. The profitability of recordholder executives’ purchases and sales decrease significantly with proxies for strong information and governance environments, suggesting that recordholders have a relatively higher propensity to exploit inside information given the opportunity to do so. Finally, our classification of executives (recordholder status) can predict future returns and firm-specific information events.

REVISION: Bank CEO Materialism, Corporate Culture and Risk
Date Posted:Tue, 17 May 2016 06:21:52 -0500
We examine the extent to which bank CEOs exert influence on the corporate cultures of banking organizations by investigating how the prevalence of materialistic bank CEOs has evolved over time, and how observed risk management policies, the behavior of non-CEO executives and bank tail risk vary with bank CEO materialism. We document that between 1994 and 2004 the proportion of U.S. banks run by materialistic CEOs increased significantly in absolute terms and relative to non-financial firms, coinciding with significant bank deregulation. Using an index reflecting the strength of risk management functions (RMI), we find that RMI is significantly lower for banks with materialistic CEOs, significantly increases after a non-materialistic CEO replaces a materialistic CEO, and decreases after a materialistic CEO succeeds a non-materialistic one. We also provide evidence consistent with non-CEO executives in banks with materialistic CEOs more aggressively exploiting inside trading ...

REVISION: Executives’ 'Off-the-Job' Behavior, Corporate Culture, and Financial Reporting Risk
Date Posted:Mon, 03 Mar 2014 08:43:26 -0600
We examine how executives’ behavior outside the workplace, as measured by their ownership of luxury goods (low “frugality”) and prior legal infractions, is related to financial reporting risk. We predict and find that CEOs and CFOs with a legal record are more likely to perpetrate fraud. In contrast, we do not find a relation between executives’ frugality and the propensity to perpetrate fraud. However, as predicted, we find that unfrugal CEOs oversee a relatively loose control environment characterized by relatively high and increasing probabilities of other insiders perpetrating fraud and unintentional material reporting errors during their tenure. Further, cultural changes associated with an increase in fraud risk are more likely during unfrugal (vs. frugal) CEOs’ reign, including the appointment of an unfrugal CFO, an increase in executives’ equity-based incentives to misreport, and a decline in measures of board monitoring intensity.

REVISION: Executives’ 'Off-the-Job' Behavior, Corporate Culture, and Financial Reporting Risk
Date Posted:Wed, 26 Jun 2013 09:33:29 -0500
We examine how and why two aspects of CEO behavior outside the workplace, as measured by prior legal infractions and the ownership of luxury goods, are related to the likelihood of misstated financial statements, including fraud and material reporting errors. We interpret an executive’s prior record of legal infractions, including charges of driving under the influence, other drug related charges, domestic violence, reckless behavior, disturbing the peace, and speeding tickets, as a symptom ...

REVISION: Executives’ 'Off-the-Job' Behavior, Corporate Culture, and Financial Reporting Risk
Date Posted:Sat, 30 Jun 2012 12:37:25 -0500
We examine how and why two aspects of CEO behavior outside the workplace, as measured by prior legal infractions and the ownership of luxury goods, are related to the likelihood of misstated financial statements, including fraud and material reporting errors. We interpret an executive’s prior record of legal infractions, including charges of driving under the influence, other drug related charges, domestic violence, reckless behavior, disturbing the peace, and speeding tickets, as a symptom ...

REVISION: Investment Cash Flow Sensitivities Really Reflect Related Investment Decisions
Date Posted:Tue, 06 Sep 2011 12:28:07 -0500
An important, unresolved issue in finance is whether the sensitivity of capital investment to internally generated cash flows reflects the impact of binding financing constraints on firms’ investment decisions. We contribute new insight to this debate by providing systematic evidence that investment-cash flow sensitivity (ICFS) primarily reflects the fundamental connection between capital investment and working capital investment as interrelated manifestations of firm growth. We decompose the ...

REVISION: Investment Cash Flow Sensitivities Really Reflect Related Investment Decisions
Date Posted:Thu, 24 Feb 2011 18:10:06 -0600
A large literature estimates the sensitivity of capital investment to internally generated cash flows to investigate the impact of financing frictions on corporate investment. A debate over whether investment-cash flow sensitivity reflects financing frictions or something else has been ongoing for many years without resolution. This paper provides a novel and intuitive explanation for documented patterns in investment-cash flow sensitivity. We argue and provide strong corroborating evidence ...

New: Capital Allocation and Timely Accounting Recognition of Economic Losses
Date Posted:Tue, 04 Jan 2011 15:32:02 -0600
This paper explores direct relations between corporate investment behavior and the timeliness of accounting recognition of economic losses (TLR) reflected in a country’s accounting regime. We explicitly investigate the extent to which TLR influences investment decisions of firm managers. Given the asymmetric emphasis on negative outcomes inherent in TLR, we hypothesize that TLR will most strongly influence investment behavior when managers face deteriorating investment environments. We ...

REVISION: Investment-Cash Flow Sensitivities are Really Investment-Investment Sensitivities
Date Posted:Tue, 06 May 2008 06:48:19 -0500
A large empirical literature in accounting, economics and finance studies the relation between corporate investment and internally generated cash flows to test for the existence and significance of financing constraints. In this paper, we argue that much of the extant literature confounds the notion of cash flow with accrual accounting net income, which by construction does not represent cash flow. We provide compelling evidence that the documented patterns in investment-cash flow ...

REVISION: Investment-Cash Flow Sensitivities are Really Investment-Investment Sensitivities
Date Posted:Wed, 12 Sep 2007 09:12:58 -0500
We provide strong evidence that documented patterns in investment-cash flow sensitivities across a-priori partitions based on dividend payouts, firm age and Cleary's (1999) metric do not reflect financing frictions, but rather reflect the direct connection between capital investment and corresponding investments in non-cash working capital. We argue that the cash flow variable typically used in estimating investment-cash flow sensitivities, earnings before depreciation, really serves as a ...

REVISION: Investment-Cash Flow Sensitivities are Really Investment-Investment Sensitivities
Date Posted:Sun, 08 Apr 2007 20:39:30 -0500
We provide strong evidence that documented patterns in investment-cash flow sensitivities across a-priori partitions based on dividend payouts, firm age and Cleary's (1999) metric do not reflect financing frictions, but rather reflect the direct connection between capital investment and corresponding investments in non-cash working capital. We argue that the cash flow variable typically used in estimating investment-cash flow sensitivities, earnings before depreciation, really serves as a ...

REVISION: Investment-Cash Flow Sensitivities are Really Capital Investment-Working Capital Investment Sensitiv
Date Posted:Thu, 10 Nov 2005 21:31:27 -0600
Following Fazzari, Hubbard, and Petersen (1988), a large literature examines whether external financing frictions impact the investment decisions of firms. In this paper, we argue that many extant empirical results on investment-cash flow sensitivity are not likely the result of financing constraints. We isolate what we believe is a fundamental misinterpretation in the literature of the primary proxy used to measure firm-level cash flows. This firm-level cash flow measure, net income plus ...

Transparency, Financial Accounting Information, and Corporate Governance
Date Posted:Wed, 07 Sep 2005 07:41:34 -0500
Audited financial statements along with supporting disclosures form the foundation of the firm-specific information set available to investors and regulators. In this paper, the authors discuss economics-based research focused on the properties of accounting systems and the surrounding institutional environment important to effective governance of firms. They provide a framework for understanding the operation of accounting information in an economy, discuss a broad range of important research ...

REVISION: What Determines Corporate Transparency?
Date Posted:Tue, 30 Sep 2003 00:38:51 -0500
We investigate corporate transparency, defined as the availability of firm-specific information to those outside publicly traded firms, and viewed as the joint output of multi-faceted systems whose components collectively produce, gather, validate and disseminate information to market participants. We factor analyze an extensive range of measures capturing countries' firm-specific information environments, and isolate two factors interpreted as financial transparency and governance transparency.

REVISION: Financial Accounting Information and Corporate Governance
Date Posted:Thu, 22 May 2003 04:00:50 -0500
This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first review and analyze research on the use of financial accounting measures in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and ...

REVISION: Insider Trading Restrictions and Analysts' Incentives to Follow Firms
Date Posted:Mon, 10 Mar 2003 01:39:43 -0600
Motivated by extant finance theory predicting that insider trading crowds out private information acquisition by outside investors, we use analyst following data for 100 countries for the years 1987-1998, to study whether analyst following increases following adoption of or the initial enforcement of insider trading legislation. We document that both the intensity of analyst coverage (average number of analysts covering followed firms within a country) and breadth of coverage (the proportion ...

Financial Accounting Information and Corporate Governance
Date Posted:Wed, 12 Dec 2001 05:47:51 -0600
This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first review and analyze research on the use of financial accounting measures in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and ...

REVISION: The Sensitivity of Corporate Governance Systems to the Timeliness of Accounting Earnings
Date Posted:Fri, 13 Oct 2000 05:43:37 -0500
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 ...

REVISION: An Analysis of the Relation Between the Stewardship and Valuation Roles of Earnings
Date Posted:Thu, 25 May 2000 10:11:13 -0500
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 ...

An Empirical Investigation of Trends in the Absolute and Relative Use of Earnings in Determining Cas...
Date Posted:Wed, 06 Jan 1999 03:44:40 -0600
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 ...