Executive Compensation: A Model of Disclosure Choice

Recent public policy debates have led to increased calls for full transparency of executive compensation. However, in practice, many firms are reluctant to disclose the full details of how they link executive compensation to performance. One possible reason for lack of full disclosure is that managers use their power to hide the details of their compensation plan in order to disguise opportunistic rent extraction. If this is the reason for secrecy, then public policy designed to force firms to provide full disclosure is unlikely to be resisted by shareholders. However, another possible explanation for less than full transparency is that some degree of secrecy about executive compensation may be in the interest of the company and its shareholders. If this explanation is correct, then public policy moves to increase transparency may be met by counter moves designed to protect managers and shareholders from such policies. In this paper we investigate if full disclosure of executive compensation arrangements is always optimal for shareholders. We develop a model where optimal executive remuneration solves a moral hazard problem. However, the degree to which the moral hazard problem affects the shareholders depends on hidden information, so that disclosure of the executive compensation scheme will typically reveal the hidden information, which can be harmful to shareholders. The model derives, therefore, the optimal disclosure policy and the optimal remuneration scheme. We find that the shareholders are better off pre‐committing not to disclose the executive compensation scheme whenever possible. Executive directors are shown to be better off too in the absence of disclosure of executive compensation schemes. An argument for mandating disclosure is that it provides better information to shareholders but our analysis demonstrates that disclosure does not necessarily achieve this objective. The results suggest that less than full disclosure can be in the interest of shareholders, the reason for this being that disclosures cannot be made selectively to shareholders but will also be made to strategic opponents. This will be the case if the board of directors and the remuneration committee includes enough independent directors. Whether or not non‐disclosure to shareholders is in their interest is however an empirical matter involving a trade‐off between the proprietary costs associated with disclosure to shareholders and the costs of potential collusion between executive and non‐executive directors associated with non‐disclosure.     

GOVERNMENTAL ACCOUNTING IN NORWAY: A DISCUSSION WITH IMPLICATIONS FOR INTERNATIONAL DEVELOPMENT

Accrual accounting is now being introduced in governmental organizations internationally. Some scholars have, however, questioned this development, implying that other accounting theories, like cameral accounting, should also be considered for use in these organizations. Since Norway is a country, which has not introduced accrual accounting in the governmental sector, the purpose of this paper is to study the evolution of governmental accounting in this country. Based on the Norwegian experiences, the paper aims to present some conclusions for the further international development of governmental accounting.     

Securities fraud

Recent frauds in investment banks and securities houses have revealed how vulnerable modern financial institutions are to criminal activity by their employees. In this paper, we examine how regulators may limit the incidence of securities fraud by encouraging firms to provide managers and dealers with appropriate incentives and by imposing ex post penalties once a fraud has been discovered     

Regulatory competition and rules/principles‐based regulation

This paper analyses how regulatory competition affects principles‐based and rules‐based systems of regulation. Competition between regulators creates the possibility of regulatory arbitrage that generates a race to the bottom by regulators that is socially harmful. We derive the welfare effects of such competition and the regulatory response to these effects, in particular, regulatory harmonisation. We find, however, that regulators can adopt harmful regulatory harmonisation. These effects can make coordination efforts in developing global regulation socially desirable. We demonstrate, moreover, that corporate lobbying is not always harmful: it can both encourage and discourage socially desirable regulation.     

Informational leverage: the problem of noise traders

The literature suggests that security design can be used to manipulate the information content of securities prices [what is referred to as the “informational leverage effect” in Boot and Thakor (J Finance 48, 1349–1378, 1993)]. The informational leverage effect arises in this literature in a market microstructure environment in which noise trade is exogenous, which is a fairly standard assumption dating back to the framework developed in Grossman and Stiglitz (Am Econ Rev 70, 393–408, 1980). This assumption is relaxed in our paper, and we show that the informational effects described in the related literature become less clear cut when noise trading activity is endogenous. We find that the intensity and direction of these effects depends crucially on the parameters describing the modeling environment. The elegant point of the informational leverage literature is that these effects arise largely independently of such parameters, but with endogenous noise trading that is no longer true. This literature may, therefore, lead to too strong conclusions being drawn about the relationship between information revelation and security design. We are very grateful for the helpful comments made by an anonymous referee.     

Follow the Leader or the Pack? Regulatory Focus and Academic Entrepreneurial Intentions

Drawing on the academic entrepreneurship and regulatory focus theory literature, and applying a multilevel perspective, this paper examines why university academics intend to engage in formal (spin‐off or start‐up companies and licensing university research) or informal (collaborative research, contract research, continuous professional development, and contract consulting) commercialization activities and the role local contextual factors, in particular leaders and work‐group colleagues (peers), play in their commercialization choices. Based on a survey of 395 science, technology, engineering, and mathematics (STEM) academics working in 14 Scottish universities, the research findings suggest that an individual's chronic regulatory focus has a direct effect on their formal and informal commercialization intent. The results reveal that the stronger an individual's chronic promotion focus the stronger their formal and informal commercialization intentions and a stronger individual chronic prevention focus leads to weaker intentions to engage in informal commercialization. In addition, when contextual interaction effects are considered, leaders and workplace colleagues have different influences on commercialization intent. On the one hand, promotion‐focused leaders can strengthen and prevention‐focused leaders can under certain circumstances weaken a promotion‐focused academic's formal commercialization intent. On the other hand, the level of workplace colleague engagement, acting as a reference point, strengthens not only promotion‐focused academics’ intent to engage in formal commercialization activities, but also prevention‐focused academics’ corresponding informal commercialization intent. As such, universities should consider the appointment of leaders who are strong role models and have a track record in formal and/or informal commercialization activities and also consider the importance workplace colleagues have on moderating an academic's intention to engage in different forms of commercialization activities.     

The Market for Corporate Control and the Agency Paradigm

The paper analyzes the role of agency driven takeover activity. The analysis shows that takeovers can play an important role in reducing agency costs even though the gains from the corporate restructuring that follows the takeovers are zero, which counters existing models of agency driven takeover activity. The model can therefore form the basis for deriving empirical predictions which discriminate between the agency paradigm and the corporate restructuring paradigm of takeover activity. Negative post-merger performance (Agrawal et al., 1992), which is inconsistent with corporate restructuring is consistent with this model, and that takeover targets' investment levels are below or at the average (Servaes 1994), which is inconsistent with the free cash flow theory is also consistent with this model.     

Earnings management and IPO anomalies in China

This paper empirically examines the impact of earnings management and investor sentiment on IPO anomalies using a sample of 506 Chinese IPOs issued over the 1998–2003 period. We develop a parsimonious pricing model in which both the offer price and the short-term aftermarket price are influenced by the use of earnings management, and show that the offer price can be below the fair price while the short-term equilibrium price in the aftermarket can be overvalued due to investor sentiment. Consistent with the overreaction hypothesis, the empirical results reveal a positive relation between the initial return and managed accruals and a negative relation between the long-term stock performance and the initial return. Earnings management appears to generate a pattern where the initial price following an IPO tends to be inflated by overreaction in the secondary market but adjusts to its fundamental level in the long run. These findings are robust across a variety of test specifications.     

Large shareholders and corporate governance

The paper looks at the voluntary provision of governance to outside shareholders by an entrepreneur who takes his firm public but remains a large shareholder after the IPO. We find that the entrepreneur always puts in place an independent board which acts in the interests of the outside shareholders, but may put in place a friendly remuneration committee that ensures that CEO pay is structured to suit the entrepreneur in the cases where the retained equity stake is sufficiently large. When comparing this provision of governance to the provision preferred by a welfare maximizing regulator, we find that both voluntary overprovision and underprovision of governance can happen. Overprovision of governance happens in the cases where the entrepreneur commits to independence at the level of the remuneration committee when the regulator prefer a friendly remuneration committee. Underprovision of governance takes the form of establishing a friendly remuneration committee (with an independent board), when the regulator would prefer an independent remuneration committee (with a friendly board). We discuss the empirical predictions of the model.