The effect of financial reporting quality on CEO compensation structure: Evidence from accounting comparability

This study examines the effect of accounting comparability on the design of CEO compensation structure. After controlling for firm-specific attributes, we find that accounting comparability is positively associated with CEO equity-based compensation intensity and pay-performance sensitivity. This suggests that the improved comparability increases the usefulness of equity-based compensation and a firm is willing to offer more equity-based compensation contracts to CEOs and increase their pay-performance sensitivity. Further, we find that the impact of comparability on the CEO’s compensation contract increases with information asymmetry, which is consistent with the notion that accounting comparability is a quality of financial reporting that facilitates the use of equity-based compensation in a poor information environment. Our analysis also reveals that the effect of accounting comparability on CEO compensation structure is greater when a firm’s corporate governance is strong, consistent with the complementary relation between comparability and the exiting corporate governance in determining CEO compensation schemes. Overall, our evidence suggests that firms utilize more equity-based compensation as a proportion of total compensation under greater accounting comparability and enhance the alignment between equity-based compensation and firm performance.     

Media coverage,board structure and CEO compensation: Evidence from Taiwan

This paper investigates the relationship between CEO cash compensation and media coverage of firms, analyst forecasts and board structure using data from the Taiwan Stock Exchange. We find that, other things being equal, CEO cash compensation is much higher for firms with greater media coverage, firms with more positive news, firms with more analyst forecasts, and firms with larger institutional holdings. There is little evidence that board size and board independence affect CEO cash compensation, and CEO duality is negatively associated with CEO cash compensation     

CEO compensation contagion: Evidence from an exogenous shock

We examine how Chief Executive Officer (CEO) compensation increased at a subset of firms in response to a governance shock that affected compensation levels at other firms in the economy. We first show that Delaware-incorporated firms with staggered boards and no outside blockholders increased CEO compensation following the mid-1990s Delaware legal cases that strengthened their ability to resist hostile takeovers. Consistent with the Gabaix and Landier (2008) contagion hypothesis, non-Delaware firms subsequently increased CEO compensation when the rulings affected a substantial number of firms in their industries. We further show how these legal developments contributed significantly to the rapid increase in CEO compensation in the late 1990s.     

Shareholder litigation rights and corporate payout policy: Evidence from universal demand laws

This study exploits the staggered adoption of universal demand (UD) laws, which place significant obstacles to derivative lawsuits and thus, undermine shareholders’ rights by 23 states in the United States (U.S.) from 1989 to 2005 as a quasi-natural experiment to examine the effects of shareholder litigation rights on corporate payout policy. Weakened litigation rights for shareholders materially increase firms’ payout ratios. The effect is more pronounced for firms exposed to higher shareholder litigation risk ex-ante, firms with higher institutional holdings, and ones financially unconstrained. Overall, the findings are consistent with lower shareholder litigation threats motivating firms to increase dividend payouts.     

Board compensation practices and agency costs of debt

Extant theory and empirical evidence indicate that equity-based compensation can align the interests of managers with those of shareholders, but it has a side effect of aggravating bondholder-shareholder conflicts by increasing managers' risk-shifting incentives. Recent evidence confirms that extending equity-based compensation to outside directors also is effective in aligning their interests with those of shareholders, but its adverse effects on the debt-related agency problems are unknown. In this paper, we examine how stock and stock option compensation for outside directors affects corporate bond yields in the secondary market. Our results show that the greater the ratio of outside directors' stock and option compensation to total compensation, the lower the average yield spreads on the firms' outstanding bonds, with stock compensation having a larger impact than option compensation. Further, the effect of equity-based compensation on yield spreads is stronger for firms with lower-rated debt.     

The impact of shareholders and creditors rights on IPO performance: An international study

This paper examines the impact of cross-country variation in shareholders' and debt holders' rights on post-IPO performance and survival of newly listed stocks across the globe. Using a sample of 10,490 initial public offerings (IPOs) in 40 countries between 2000 and 2013, we find that post-IPO performance and survival is better in countries with stronger shareholder protection, but the impact of creditor protection is negative i.e. stronger creditor protection leads to poor post-IPO performance and survival. This effect is driven by rules requiring creditors’ consent for company reorganization and the mandatory replacement of incumbent managers. Reputable IPO advisors exacerbate the positive impact of shareholder rights and the negative impact of creditor rights.     

Financial industry lobbying and shareholder litigation outcomes: implications for managers and regulators

We examine the relationship between financial firm corporate lobbying, shareholder-based litigation outcomes, and firm value. We show that political lobbying lowers federal class action securities litigation likelihood for public financial institutions. Secondly, lobbying firms experience a higher likelihood of having litigation dismissed, and the average settlement amount is significantly lower for lobbying institutions. In addition, shortly after a litigation announcement, lobbying firms experience significantly higher cumulative abnormal returns (CARs), compared to non-lobbying firms. Finally, we show that lobbying firms have higher long-run buy-and-hold abnormal stock returns (BHARs) following lobbying activities. Our results link financial institution lobbying activity with improved legal outcomes and relatively higher firm value. While lobbying improves financial firm value, our results also imply that lobbying creates a disadvantage for non-lobbying firms within the industry. Our results provide insights, not only to corporate managers, but to regulators and policymakers interested in the impact of lobbying on the efficacy and objectivity of regulation and enforcement in the financial services industry.     

The effect of corporate governance on CEO luck: Evidence from the Institutional Shareholder Services (ISS)

CEOs are “lucky” when they receive stock option grants on days when the stock price is the lowest in the month of the grant, implying opportunistic timing. Extending the work of Bebchuk et al. (2010), we explore the effect of overall corporate governance quality on CEO luck. Provided by the Institutional Shareholder Services (ISS), our comprehensive governance metrics are much broader than those used in prior studies, encompassing more diverse aspects of corporate governance, such as audit, state laws, boards, ownership, and director education. We show that an improvement in governance quality by one standard deviation diminishes CEO luck by 14.77–21.06%. The governance standards recommended by ISS appear to be effective in deterring the opportunistic timing of option grants.     

Aligning debt and equity claimant interests: Evidence from dual claim investors

This study investigates how investors that own both equity and debt in the same firm affect other shareholders in the firm. It documents that dual claim investors are quite prevalent among the industrial firms listed in the Russell 3000, with over 20% of them having a bank holding company that owns both debt and equity in the firm. The results imply that shareholders are substantially impacted by the presence of dual claim investors in firms, suggesting that relatively small ownership stakes by dual claim banks are associated with greater conflicts of interest among shareholders and debt holders; while relatively large bank equity stakes may benefit outside shareholders when aligned with loan by dual claim banks because they improve bank monitoring incentives and reduce the agency cost of debt.     

Law and Project Finance

We investigate Project Finance as a private response to inefficiencies created by weak legal protection of outside investors. We offer a new illustration that law matters by demonstrating that for large investment projects, Project Finance provides a contractual and organizational substitute for investor protection laws. Project Finance accomplishes this by making cash flows verifiable through two mechanisms: (i) contractual arrangements made possible by structuring the project within a single, discrete entity legally separate from the sponsor; and (ii) private enforcement of these contracts through a network of project accounts that ensures lender control of project cash flows. Comparing bank loans for Project Finance with regular corporate loans for large investments, we show that Project Finance is more likely in countries with weaker laws against insider stealing and weaker creditor rights in bankruptcy. We identify the predicted effects using difference-in-difference and triple-difference tests that exploit exogenous country-level legal changes and inter-industry differences in free cash flow and tangibility of assets.     

The effects of board structure on corporate performance: Evidence from East African frontier markets

The effectiveness of the well-known corporate governance practices may not be universal due to fundamental differences in the environments under which firms operate. By using hand-collected data from all the non-financial firms listed on the unexplored East African frontier markets (i.e., Kenya, Tanzania and Uganda), we examine the effect of board characteristics on the performance of firms. Our results show that board size has a negative and significant effect on firm performance. The presences of foreigners and civil servants on the board play positive roles on financial performance, where the agency and resource dependence theories apply. Further, we find that board members with higher education also contribute to firm performance. These findings still hold when we consider the 2008–2009 financial crisis period. Overall, we show that in a business climate where ownership is largely dominated by few shareholders, the conventional governance mechanisms do not work effectively.     

Customer prospects and pay-performance sensitivity: Evidence from Korea

This paper examines how business prospects in customer firms affect executive pay-performance sensitivity in supplier firms. Using Korean Input-Output Accounts Data and Business Confidence Index published by the Bank of Korea, I find that customer prospects are positively associated with executive pay-performance sensitivity and the association is extended to the components of performance in a way that encourages managers to better exploit the market opportunities. The positive association is more pronounced when the inter-industry data are more informative, when the firm belongs to a more competitive industry, and when the corporate governance is stronger.Data availabilityAll data are publicly available from sources identified in the text.     

Corporate voluntary disclosure and the separation of cash flow rights from control rights

We find that corporate voluntary disclosure is negatively associated with the separation of cash flow rights from control rights. This result is consistent with the notion that as the separation of cash flow rights from control rights increases, controlling owners have larger incentives to expropriate the wealth of minority shareholders and low corporate disclosure constitutes a mechanism to facilitate controlling owners in masking their private benefits of control. The negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms with greater external financing needs. This result suggests that for firms with high separation of cash flow rights from control rights, those with greater external financing needs undertake higher firm-level voluntary disclosure to reduce information asymmetry. We also find that the negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms that have a large non-management shareholder. Our result supports the role of large non-management shareholder in mitigating agency problems associated with the separation of ownership and control.

Governance Transparency and Capital Allocation: A Note

Habib (2008) shows that financial transparency, but not governance transparency, is related to efficiency in capital allocation. I argue that governance transparency is more likely to facilitate capital allocation in declining industries where agency problems intensify. Empirical evidence from a sample of 39 countries supports this argument.     

公司治理结构与多元化投资——来自中国上市公司的经验证据

对2008年我国上市公司公司治理结构对多元化投资的影响进行实证研究后发现:股权集中度与多元化程度显著负相关;国有股比例和法人股比例与多元化程度负相关,但不显著。董事会规模、独立董事人数和两职合一状态与多元化投资不具有显著的相关性;董事会会议次数与多元化程度显著正相关;高级管理层持股比例与多元化程度相关性不显著;资产负债率与多元化程度正相关,但不显著。     

Monitoring and corporate disclosure: Evidence from a natural experiment

Using an experimental design that exploits exogenous reductions in coverage resulting from brokerage house mergers, we find that a reduction in coverage causes a deterioration in financial reporting quality. The effect of coverage on disclosure is more pronounced for firms with weak shareholder rights, consistent with a substitution effect between analyst monitoring and other corporate governance mechanisms. The effects we uncover using our experimental design are an order of magnitude larger than estimates from ordinary least squares regressions that do not account for the endogeneity of coverage. Overall, our results suggest that security analysts monitor managers and entrenched managers adopt less informative disclosure policies in the absence of such scrutiny.     

Executive compensation in business groups: Evidence from China

This paper examines executive compensation in the subsidiaries of business groups in China. Analyzing a sample of China business groups(the so-called'Xi Zu Ji T...     

Adopting better corporate governance: Evidence from cross-border mergers

Cross-border mergers allow firms to alter the level of protection they provide to their investors, because target firms usually import the corporate governance system of the acquiring company by law. Therefore, cross-border mergers provide a natural experiment to analyze the effects of changes in corporate governance on firm value, and on an industry as a whole. We construct measures of the change in investor protection induced by cross-border mergers in a sample of 7330 ‘national industry years’ (spanning 39 industries in 41 countries in the period 1990–2001. We find that the Tobin's Q of an industry — including its unmerged firms — increases when firms within that industry are acquired by foreign firms coming from countries with better shareholder protection and better accounting standards. We present evidence that the transfer of corporate governance practices through cross-border mergers is Pareto improving. Firms that can adopt better practices willingly do so, and the market assigns more value to better protection.     

Multiple large shareholders and corporate environmental protection investment: Evidence from the Chinese listed companies

Agencies can reduce problems by adopting a governance structure of multiple large shareholders. However, multiple large shareholders may collude, thereby reducing the behavior that can create long-term value for the company. This paper uses a sample of companies listed on the Shenzhen and Shanghai stock exchanges between 2008 and 2017 to investigate the relationship between multiple large shareholders and corporate environmental protection investment (CEPI). We find that multiple large shareholders will significantly reduce CEPI. Specifically, external supervision and a company’s ownership structure affect the relationship between multiple large shareholders and CEPI. In addition, after participating in SOEs, non-state-owned shareholders will significantly improve CEPI of SOEs.