Accounting-Based Compensation and Debt Contracts*

We examine how accounting-based compensation plans influence a firm's contracts with its creditors. After granting long-term accounting-based compensation plans (LTAPs) to CEOs, firms pay lower spreads and have fewer restrictive covenants in new bank loans. Mechanisms leading to lower borrowing cost include improvements in debt repayment ability, reduced shareholder-debtholder conflicts, and reduced risk-taking incentives. Creditors view LTAPs as a substitute for monitoring, adjust covenant design based on LTAP features, and value plans with concave performance-payout functions and reasonable performance targets. A firm's credit rating improves and CDS spread declines after LTAP grants, suggesting that LTAPs help reduce firms' credit risk.     

Deciphering Tax Avoidance: Evidence from Credit Rating Disagreements

This study investigates the role of tax avoidance in the credit‐rating process and whether differences exist in how rating agencies account for the risk relevance of tax avoidance. Using a sample of initial credit ratings assigned to public debt issuances during 1994–2013, our evidence is consistent with Moody's Investors Service and Standard & Poor's assessing the costs and benefits associated with tax avoidance differently from one another, resulting in more frequent and pronounced rating agency disagreement. Rating agency disagreement over tax avoidance is most evident when it is accompanied by relatively high levels of uncertain tax positions, foreign activities, research and development activities, or tax footnote opacity. We also find evidence that decreases (increases) in tax avoidance or tax footnote disclosure opacity are positively (negatively) associated with the convergence of split ratings. This suggests that firms can exacerbate or mitigate rating agency disagreement subsequent to bond issuance. Our study complements prior research by examining why sophisticated information intermediaries disagree about the risk relevance of tax avoidance. It also sheds light on how firms can influence rating agencies’ understanding of tax avoidance.     

Credit Rating Agency and Equity Analysts’ Adjustments to GAAP Earnings

Moody's analysts and sell‐side equity analysts adjust GAAP earnings as part of their research. We show that adjusted earnings definitions of Moody's analysts are significantly lower than those of equity analysts when companies exhibit higher downside risk, as measured by volatility in idiosyncratic stock returns, volatility in negative market returns, poor earnings, and loss status. Relative to the adjusted earnings definitions of equity analysts, adjusted earnings definitions of Moody's analysts better predict future bankruptcies, yet they fare significantly worse in predicting future earnings and operating cash flows. These findings persist after controlling for optimism incentives of analysts, reporting incentives of companies, credit rating levels, and industry and year effects. Our findings suggest that credit rating agencies cater to their clients’ demand for a more conservative interpretation of company‐reported performance than what is offered by equity analysts.     

Managerial Ability and Credit Ratings

We test whether credit rating analysts consider managerial ability as a credit risk factor and find that higher‐ability managers obtain more favorable credit ratings. Controlling for past performance, these results suggest that managerial ability is itself a significant credit rating factor. Cross‐sectional analyses indicate that managerial ability is beneficial specifically in firms facing financial or competitive pressure. We find that high‐ability managers mitigate the adverse impact on ratings of other credit risk factors including negative earnings and low interest coverage. Our results contribute to a growing literature documenting economic benefits to hiring and retaining high‐quality management.     

Can Shareholders Be at Rest after Adopting Clawback Provisions? Evidence from Stock Price Crash Risk

Using a propensity score matched sample and a difference‐in‐differences research design, we find that stock price crash risk increases after a firm voluntarily incorporates clawback provisions in executive officers' compensation contracts. This heightened crash risk is concentrated in adopters that increase upward real activities‐based earnings management and those that reduce the readability of 10‐K reports. Based on cross‐sectional analyses, we also find that the increased crash risk is more pronounced for adopters with high ex ante fraud risk, low‐ability managers, high CEO equity incentives, and low dedicated institutional ownership. Collectively, our results suggest that the clawback adoption per se does not curb managerial opportunism but rather induces managers to use alternative channels for concealing bad news, which may contribute to a greater stock price crash risk; and the increase in crash risk is more likely in cases where incentives are strong or monitoring is weak. Our results should be of interest to regulators and policymakers considering the effects of clawback adoption on the investing public.     

结构性违约、信用分层与评级机构的策略性反应——来自中国信用债市场的证据

2014年以来,以主要集中于民企的"结构性违约"宣告了中国信用债市场刚性兑付的"结构性打破",债券市场进入了新的发展阶段。利用2013-2017年债券数据,本文深入分析了结构性违约对评级机构行为和效率的影响,主要有如下发现：首先,信用评级的市场公信力会因政府隐性担保导致的"刚性兑付"而削弱;其次,结构性违约爆发之后,信用评级的整体效率有所提升,但在不同发行主体呈现分化,对于非城投类企业,信用评级对发行利差的影响显著增大,意味着评级公信力的显著提升,而对于城投类企业,评级效率并未明显改善;进一步研究表明,出现这种情况的原因在于评级机构在违约后采取了差异化的评级策略,对于违约风险较大的非城投类债券,评级机构倾向采取"收紧评级"的策略;对于违约风险较低的城投债,评级机构倾向于采取"放宽评级"的策略。这种策略性行为是导致市场"信用分层"的重要原因,并有可能推升民营企业的融资成本。     

Corporate Governance Reform and Executive Incentives: Implications for Investments and Risk Taking

We investigate the mechanism through which the Sarbanes Oxley Act (SOX) was associated with changes in corporate investment strategies. We document that the passage of the governance regulations in SOX was followed by a significant decline in pay‐performance sensitivity (Delta) and incentives to take risk (Vega) in CEOs' compensation contracts. These changes in compensation contracts are related to a decline in investments, including research and development expenditures, capital investments and acquisitions. Moreover, consistent with the rules in SOX directly affecting CEOs' incentives to take risk, we document that the decline in investments exceeds the amount that would be expected from changes in compensation packages alone. Finally, we also find evidence that the changes in investments are related to lower operating performances of firms, suggesting that these changes were costly to investors. Our evidence speaks to the debate on how corporate governance regulation interacts with firms' and managers' incentives, and ultimately affects corporate operating and investment strategies. Our study suggests that one indirect cost of such regulations in SOX is the significant reductions in corporate risk‐taking activities in the post‐SOX period. The changes in investments were in part due to changes in executive compensation contracts and in part related to increased executives' personal costs of engaging in risky activities.     

Deferred Executive Compensation Policies in Chinese State-owned Enterprises

Since the commencement of industrial reform in China, most Chinese state‐owned enterprises have adopted a deferred executive compensation policy to provide incentives for their management teams. However, the effectiveness of such a policy needs to be evaluated. In this paper, we specify a model of deferred executive compensation policy, in which the compensation for executives is contingent on firms' future revenue. The model suggests that under deferred executive compensation policies, managers exhibit an increasing level of effort in every period. Furthermore, the deferred compensation policy encourages managers to make long‐term investments, which might generate revenue even after the termination of managerial contracts.     

The Forgotten Risk: Financial Incentives

Summary  The number of risks that are taken into account by risk managers has grown over the years, but they still have a blind spot for the danger that remuneration schemes and financial incentives can lead to more risk taking. Such an effect constitutes a regime change, making standard statistical analyses of previous data obsolete. Common remuneration contracts for hedge fund managers and bank traders provoke risk taking and lead to volatile results. The incentive structure of rating agencies sheds doubts on the quality of their judgment. Risk managers should address the behavioral effects of incentive schemes, both inside and outside their firm. Incentive schemes should be corrected in such a way that only long-term results pay off. CEO, ABN-AMRO Bank and former Minister of Finance. These comments were prepared for the occasion of the Jelle Zijlstra Lecture by Martin Hellwig at the VU University, Amsterdam, May 27, 2008, when Gerrit Zalm was CFO of DSB Bank.     

CEO并购补偿会影响股东财富吗?

目标公司CEO的并购补偿是否会影响股东财富?以2009~2021年被收购的2946个目标公司为样本采用实证研究法探究了目标公司CEO并购补偿对股东财富的影响。研究发现:CEO并购补偿对股东财富的影响在不同预期协同效应下具有显著差异,预期协同效应较高时降低了目标公司股东财富,预期协同效应较低时,提高了目标公司股东财富。当目标公司存在盈余管理时,CEO并购补偿对目标公司股东财富的负面影响更加显著。进一步分析了不同协同效应下目标公司CEO并购补偿对股东财富影响的作用机制,目标公司发放并购补偿的程度及CEO留任可能性是其主要原因。文章丰富了国内以目标公司为视角研究并购中CEO薪酬与股东代理问题的文献,为规范目标公司CEO在并购中的行为、提高股东财富提供了理论支持与经验证据。     

中小企业信用担保机构担保风险分析

中小企业通过信用担保机构获得融资已成为一条解决"融资难"问题的重要渠道.我国以中小企业信用担保体系的制度性安排为基础,但中小企业信用担保体系存在着三重制度性缺陷:结构性缺陷、经营管理性缺陷和功能性缺陷.中小企业信用担保机构担保风险防范和调适,应做到以下五点:监管部门指导担保机构做好风险识别、量化和管理工作;加强法律法规建设;政府担保机构要坚持政策性资金实行市场化经营的原则,避免行政干预;建立和完善担保机构的资金补偿机制和各种风险防范机制;积极推进中小企业信用制度和担保机构信息化建设.     

Rating the UK: the British government's sovereign credit ratings, 1976–8

The UK received its first sovereign credit ratings in 1978. Despite having required financial assistance from the International Monetary Fund only 18 months earlier, the British government managed to secure ‘triple‐A’ ratings from both Standard and Poor's and Moody's. Both assessments of creditworthiness reflected improving economic conditions but also British efforts to influence the sovereign ratings process. The Bank of England and the Treasury sought guidance from American investment banks to prepare for the ratings process and then controlled the flow of information available to the rating agencies accordingly, stressing the strengths of the national economy and downplaying the weaknesses. The British government subsequently launched its first bond issue in the New York market to high levels of investor demand. Consideration of these achievements complements the historiography concerning Britain's economic fortunes in the late 1970s. Scrutiny of events also offers a rare glimpse into the confidential sovereign ratings process. Both agencies relied on a combination of quantitative and qualitative evaluations of the UK. In addition, this article highlights the existence of a unique period in the history of sovereign credit ratings. From 1974 to 1985, the ratings industry enjoyed a cautious revival focused principally on ‘triple‐A’ borrowers.     

Discretionary Accounting Choices and CEO Compensation*

This paper makes four contributions to the literature relating accounting choices to CEO compensation. First, it shows that discretionary accruals are associated with CEO cash compensation, a result that holds after controlling for both the nondiscretionary components of income and increases in shareholder wealth. Although significant, the coefficient on discretionary accruals is significantly lower than that on nondiscretionary accruals, which in turn is significantly lower than the coefficient on operating cash flows. Second, the paper shows a differential reaction to positive and negative discretionary accruals —- the association between positive discretionary accruals and CEO cash compensation is significantly greater than the association between negative discretionary accruals and CEO cash compensation. Third, the paper shows the association between discretionary accruals and CEO cash compensation varies depending upon the circumstances of the firm. In particular, when positive discretionary accruals allow the firm to reduce or avoid a loss, the association between CEO cash compensation and discretionary accruals is significantly greater. Finally, this paper shows that the association of CEO cash compensation with reported income generally increases with the level of discretionary accruals, consistent with management responding to the incentives provided.     

Employee Stock Option Fair‐Value Estimates: Do Managerial Discretion and Incentives Explain Accuracy?*

We examine the determinants of managers' use of discretion over employee stock option (ESO) valuation‐model inputs that determine ESO fair values. We also explore the consequences of such discretion. Firms exercise considerable discretion over all model inputs, and this discretion results in material differences in ESO fair‐value estimates. Contrary to conventional wisdom, we find that a large proportion of firms exercise value‐increasing discretion. Importantly, we find that using discretion improves predictive accuracy for about half of our sample firms. Moreover, we find that both opportunistic and informational managerial incentives together explain the accuracy of firms' ESO fair‐value estimates. Partitioning on the direction of discretion improves our understanding of managerial incentives. Our analysis confirms that financial statement readers can use mandated contextual disclosures to construct powerful ex ante predictions of ex post accuracy.     

Corporate Investment Incentives and Accounting‐Based Debt Covenants*

This paper studies the conditions under which accounting‐based debt covenants increase firm value in a setting that incorporates the conflicting incentives of shareholders, bondholders, and managers. We construct a model in which debt is needed to discipline managerial investment decisions despite endogenous compensation contracts. We show that accounting covenants increase value when (1) debt serves as a credible commitment to penalize poor investment decisions; (2) the firm faces other (exogenous) sources of uncertainty that can make debt risky despite good investment decisions; and (3) accounting information serves as a contractible proxy for firm's economic performance. In these circumstances, accounting covenants ensure that shareholders do not offer compensation schemes that would encourage bondholder wealth expropriation when the debt becomes risky. A covenant specifying a required level of accounting performance provides additional bondholder power when performance is low. An accounting‐based dividend covenant allows a disbursement to maintain investment incentives when performance is high without allowing dividend‐based expropriation. The optimal covenants depend on the reliability of accounting information, and the interaction between accounting performance and the different incentive conflicts provides new insight into the empirical literature on accounting‐based covenants.     

CEO Hedging Opportunities and the Weighting of Performance Measures in Compensation Contracts

This study examines the rather controversial practice of managerial hedging, which allows CEOs to delink their compensation from stock price performance. We presume that boards are aware of these practices and adjust the weights placed on accounting‐based and stock‐based performance measures in executive compensation contracts to mitigate the problem. Empirically, we find that, in the presence of managerial hedging opportunities, accounting‐based performance measures receive more weight, whereas stock‐based performance measures receive less weight in determining executive compensation. Moreover, these results are more pronounced when managerial hedging needs are high. Regarding the effects of earnings management resulting from accounting‐based incentives, we find that good auditing and strong governance mechanisms strengthen the benefit of placing more weight on accounting‐based performance measures. Taken together, our findings suggest that corporate boards shift the relative weights of performance measures in compensation contracts in response to managerial hedging opportunities, which is consistent with optimal contracting.     

当前国际信用评级机构的市场表现、影响及其评价

国际三大评级公司标准普尔、穆迪和惠誉对当前欧洲主权债务危机的信用评级不仅没有起到危机预警作用,反而在一次次地调低这些国家的信用评级过程中使债务危机不断扩散和升级。国际信用评级机构在提高金融市场效率的同时,也给国际经济和国际金融市场带来了一定的负面影响,而为了改变这种状况,必须打破国际信用评级市场对美国信用评级机构的依赖,实现国际和国内评级机构对国际评级市场的相互渗透与结合。     

Abstracts/Résumés

This paper examines whether credit analysts utilize the information contained in the difference between book and taxable income in analyzing a firm’s credit risk. Increased book–tax differences may be informative for credit rating agencies as they may signal decreased earnings quality or changes in the firm’s off–balance sheet financing. Results suggest a significant negative association between positive changes in book–tax differences and ratings changes. This evidence is consistent with large positive changes in book–tax differences signaling decreased earnings quality and/or increased off–balance sheet financing. We also find that large negative changes in book–tax differences result in less favorable rating changes, consistent with these changes signaling decreased earnings quality. In additional analyses, we find that the association between changes in book–tax differences and rating changes is attenuated for high–tax‐planning firms (e.g., where book–tax differences more likely reflect tax planning than decreased earnings quality).     

The Influence of Ownership and Compensation Practices on Charitable Activities

Recent accounting research provides evidence that similar profit‐based compensation incentives are used in for‐profit and nonprofit hospitals. Because charity care reduces profits, such incentives should lead for‐profit hospital managers to reduce charity care levels. Nonprofit hospital managers, however, may respond differently to the same incentives because they face a different set of institutional pressures and constraints. We compare the association between pay‐for‐performance incentives and charity care in for‐profit and nonprofit hospitals. We find a negative and significant association between charity care and our proxy for profit‐based incentives in for‐profit hospitals, and no significant association in nonprofit hospitals. These results suggest that linking manager pay to profitability does not appear to discourage charity care in nonprofit hospitals. Apparently, the nonprofit mission, institutional pressures, and ownership constraints moderate the potentially negative effects of profit‐based incentives. Because this evidence partially alleviates concerns over nonprofit compensation arrangements that mirror those used in for‐profit hospitals, it should be of interest to regulators and policymakers. In addition, this study provides insights into accounting researchers about institutional and organizational influences that affect managerial responses to financial incentives in compensation contracts.     

THE DETERMINANTS OF SOVEREIGN CREDIT RATINGS: A NEW EMPIRICAL APPROACH

The purpose of this paper is to extend the literature on the determinants of sovereign credit ratings by, firstly, showing empirically that there is a probable bias in the results obtained by previous studies and, secondly, to combine a General‐to‐Specific (GETS) model selection strategy with Dynamic Panel Data estimation techniques to resolve these biases. The results are encouraging: the preferred model is not only statistically adequate, but also economically significant and consistent with the categories of variables deemed to be important by the agencies who construct sovereign credit ratings.