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.

Hedge Fund Activism in the Corporate Bond Market: Evidence from Bondholders? Responses to Delay in Financial Reporting
Date Posted:Wed, 18 Apr 2018 16:48:47 -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 hedge-fund-involved interventions are associated with elevated bond trading frequency before late filing notifications and a wealth transfer from stockholders and non-intervening bondholders to intervening bondholders. However these results are not present for non-hedge-fund-involved interventions. Taken together, the empirical evidence suggests that hedge fund activism in the corporate bond market is primarily driven by short-term profit consideration.

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 ...

Executives? Legal Records and Insider Trading Activities
Date Posted:Mon, 27 Feb 2017 18:47:26 -0600
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. Finally, our classification of executives (recordholder status) can predict future firm returns and firm-specific news and information events.

CEO Materialism and Corporate Social Responsibility
Date Posted:Tue, 14 Jun 2016 14:46:09 -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: 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.

Executives? Legal Records and Insider Trading Activities
Date Posted:Mon, 13 Jun 2016 17:46:16 -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.

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.

Bank CEO Materialism: Risk Controls, Culture and Tail Risk
Date Posted:Tue, 17 May 2016 15:21:51 -0500
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 banks with materialistic CEOs have significantly more downside tail risk relative to banks with non-materialistic CEOs; the difference between groups increased significantly during the recent crisis.

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 ...

Executives? 'Off-the-Job' Behavior, Corporate Culture, and Financial Reporting Risk
Date Posted:Sat, 30 Jun 2012 14:34:07 -0500
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: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 ...

Capital Allocation and Timely Accounting Recognition of Economic Losses
Date Posted:Tue, 04 Jan 2011 21:33:02 -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 conjecture that TLR will have an asymmetric impact on investment behavior whereby TLR impacts firms? investment decisions in the face of declining investment opportunities, but not in the face of increasing in investment opportunities. Using firm-level investment decisions spanning twenty five countries, we find that investment responses to declining opportunities increases with TLR, while we find no evidence that TLR influences the sensitivity of investment to increasing investment opportunities. Our results are robust to alternative estimates of TLR, alternative estimates of investment responses to changing investment opportunities, and to controls for important country-level, industry-level, and firm-level variables that may impact firms? investment decisions.

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 ...

Price Discovery and Dissemination of Private Information by Loan Syndicate Participants
Date Posted:Sun, 22 Mar 2009 00:00:00 -0500
We delineate key channels through which flows of confidential information to loan syndicate participants impact the dynamics of information arrival in prices. We isolate the timing of private information flows by estimating the speed of price discovery over quarterly earnings cycles in both secondary syndicated loan and equity markets. We identify borrowers disseminating private information to lenders relatively early in the cycle with firms exhibiting relatively early price discovery in the secondary loan market, documenting that price discovery is faster for loans subject to financial covenants, particularly earnings-based covenants, for borrowers who experience covenant violations, for borrowers with high credit risk, and for loans syndicated by relationship-based lenders or highly reputable lead arrangers. We then ask whether early access to private information in the loan market accelerates the speed of information arrival in stock prices. We document that the stock returns of firms identified with earlier private information dissemination to lenders indeed exhibit faster price discovery in the stock market, but only when institutional investors are involved in the firm?s syndicated loans. Further, the positive relation between institutional lending and the speed of stock price discovery is more pronounced in relatively weak public disclosure environments. These results are consistent with institutional lenders systematically exploiting confidential syndicate information

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 ...

Investment Cash Flow Sensitivities Really Reflect Related Investment Decisions
Date Posted:Fri, 11 Nov 2005 00:00:00 -0600
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 cash flow measure used in the literature, earnings before depreciation (EBD), into cash flow from operations (CFO), and working capital accruals (WCACC) which reflects net investment in working capital items like inventory and accounts receivable. We demonstrate that ICFS is driven by the natural co-movement between fixed investment and the working capital investment aspect of WCACC as complementary factors of production. In contrast, investment-CFO sensitivity is often negative and tends to decrease as financing constraints increase, inconsistent with CFO serving as a source of investment financing for constrained firms. What does this growth interpretation imply about the connection between ICFS and financing constraints? We argue that the nature of ICFS depends directly on the underlying catalyst of firm growth. If investment is driven solely by a reduction in the cost wedge between external and internal financing, ICFS reflects the investment consequences of this reduction in fina

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 ...

Transparency, Financial Accounting Information, and Corporate Governance
Date Posted:Wed, 07 Sep 2005 00:00:00 -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 findings, present a conceptual framework for characterizing and measuring corporate transparency at the country level, and isolate a number of future research possibilities.

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.

What Determines Corporate Transparency?
Date Posted:Sat, 30 Aug 2003 21:37:52 -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 primarily related to a country?s legal/judicial regime, while the financial transparency factor is primarily related to political economy.

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 ...

Insider Trading Restrictions and Analysts' Incentives to Follow Firms
Date Posted:Tue, 18 Feb 2003 21:38:51 -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 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.

Financial Accounting Information and Corporate Governance
Date Posted:Sun, 28 Apr 2002 00:00:00 -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.

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 ...

Financial Accounting Information and Corporate Governance
Date Posted:Thu, 25 Oct 2001 00:00:00 -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.

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 ...

Financial Accounting Information, Organizational Complexity and Corporate Governance Systems
Date Posted:Fri, 13 Oct 2000 00:00:00 -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: 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 Analysis of the Relation between the Stewardship and Valuation Roles of Earnings
Date Posted:Wed, 24 May 2000 00:00:00 -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 explaining cash compensation relative to information reflected in stock returns.

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 ...

An Empirical Investigation of Trends in the Absolute and Relative Use of Earnings in Determining Cash Compensation of CEOS
Date Posted:Wed, 07 Oct 1998 00:00:00 -0500
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 relevance for the purpose of inferring managers' contributions to firm value. Whether the decline in the value-relevance of earnings documented in recent research is accompanied by a decline in the stewardship relevance of earnings is an empirical issue that is the focus of this paper. We estimate pooled regressions of the pay-earnings relation allowing intercepts and slopes to vary by year and industry. While we find significant positive correlation between the sensitivities of firm value and executive pay to earnings, our results fail to detect a general trend in the sensitivity of executive pay to reported earnings. We also conduct similar pooled estimations of the pay-performance relation incorporating non-earnings information reflected in stock prices to assess the importance of earnings relative to other information. Our results suggest that there has been a general decline during the last 25 years in the importance of earnings in explaining cash compensation relative to other infor